"There is fraud at the heart of Wall Street,
according to the Securities and Exchange Commission," Simon Johnson tells us in his Baseline Scenario post on Saturday morning.
Our Pecora Moment
By Simon Johnson
Baseline Scenario
6:36 AM, April 17, 2010
We have waited long and patiently for our Ferdinand Pecora moment - a modern equivalent of the episode when a tough prosecutor from New York seized the imagination of the country in the early 1930s and, over a series of congressional hearings: laid bare the wrong-doings of Wall Street in simple and vivid terms that everyone could understand, and created the groundswell of public support necessary for comprehensive reregulation. On Friday, that moment finally arrived...
Is Johnson right or will
the forces that virtually own our government's legislative branch prevail at the end of the day? As blogger George Washington (and
Kossack Badabing, and others) all but echoed a numb public's mass frustration last night, as well: Is this the Pecora moment? Or, is it kabuki?
THE TIME TO "GO THERE" IS NOW!
Will we really go after Lloyd Blankfein's management team at Goldman Sachs, and the team that ran the place (ultimately, so many are now saying, into an ethically bereft and morally corrupt netherworld) under former Treasury Secretary Hank Paulson before him? And, what about Tim Geithner's stint as head of the Federal Reserve Bank of New York -- widely-acknowledged as the most powerful branch within the bank-owned system, and the entity that former NY Governor and Attorney General Eliot Spitzer just referred to as a "sinkhole" -- when virtually all of Wall Street (not just Lehman Brothers, as originally reported) was enabled by their overseers to "legally" misrepresent their financial statements to a public that still doesn't even know the difference between a credit default swap and a swap meet?
And, what about the rest of Wall Street?
We now know that virtually all of our country's top financial firms have been misrepresenting their financial condition for up to a decade, at least, "legally."
According to our own Department of Justice, over a dozen have fraudulently misrepresented investment products and their firms' related internal agendas--which have, too often to detail herein, run diametrically in opposition to their own clients' goals--and even their memorialized representations of same to their customers, right here in the United States. This isn't conspiracy theory. It isn't conjecture. It is fact. SEE: "JPMorgan, Lehman, UBS Named as Conspirators in Muni Bid-Rigging."
What part of: "More than a dozen Wall Street firms conspired to ripoff municipal governments across America," doesn't the public understand?
What part of: "They're all doing it," don't we get?
Exacerbating these harsh truths, we also know that existing financial reform legislation in the Senate is -- despite the bloviations of many to the contrary -- still quite weak, at best. Nomi Prins, a former Goldman-Sachs Managing Director, and another one of my favorite economic pundits, laid it all out for this week in: "Speculating Banks Still Rule -- Ten Ways Dems and Dodd Are Failing on Financial Reform."
While many approach these matters from a strictly political standpoint, the facts are the issue of financial regulatory reform is not like healthcare. As even President Obama told us, yesterday, we may only get one chance to do it right. And, unlike healthcare, we can't go back and "fix it." In fact, if we don't get it done right, and right now, there may not be much left to fix down the road. Yes, bipartisanship -- i.e.: coddling the status quo -- shouldn't even be on the table. It is time for Democrats, as Kossack DFutureIsNow just mentioned it, to go nuclear on this issue.
Obama: Fresh crisis without new financial rules
DARLENE SUPERVILLE
From Associated Press
April 17, 2010 11:25 AM EDT
WASHINGTON (AP) -- The U.S. is destined to endure a new economic crisis that sticks taxpayers with the bill unless Congress tightens oversight of the financial industry, President Barack Obama said Saturday.
The overhaul is the next major piece of legislation that Obama wants to sign into law this year, but solid GOP opposition in the Senate is jeopardizing that goal.
"Every day we don't act, the same system that led to bailouts remains in place, with the exact same loopholes and the exact same liabilities," Obama said in his weekly radio and Internet address. "And if we don't change what led to the crisis, we'll doom ourselves to repeat it..."
To the President's words in yesterday's press, I would add the following concept: It's not just about "acting," or talking about "change." Reiterating, it's about getting it right, right now. Regrettably, with the acknowledged regulatory capture of our legislative branch being a fact of life, the chances of this actually occurring anytime soon -- regulatory reform without loopholes through which a white shoe law firm may drive a Mack truck -- are quite weak, at best.
WILL ATTORNEYS GENERAL BLUMENTHAL AND CUOMO AND THE EUROPEAN UNION DO WHAT OUR FEDERAL GOVERNMENT WILL NOT? WILL THE GLOVES EVER COME OFF?
As more information slowly comes to the fore on Goldman Sachs' latest travesty du jour, we're now hearing rumblings of criminal prosecutions at the state level, starting with Connecticut AG and US Democratic Senate candidate Richard Blumenthal, over the past 48 hours, calling for same. Blumenthal is (much like NY State AG Andrew Cuomo) in somewhat of the catbird seat, since Fairfield County, Connecticut is the home of scores of major U.S. hedge funds, not to mention the US base for American International Group's (AIG's) derivatives operations. Financial services corporate office towers, with corporate logos ranging from Swiss banking giant UBS to the Royal Bank of Scotland (RBS), line the I-95 corridor in Stamford. Fairfied County is also the home of US financial services behemoth GE, whose worldwide headquarters is also based in Fairfield (the town in the county with the same name), just a few miles east, down the road.
On top of this, we're also getting wind from across the pond that the European Union is in the midst of their own investigations relating to Goldman's highly-documented failures to accurately represent Greece's financial condition to the markets (on many occasions throughout the 2000's) where the vampire squids successfully, and (allegedly) fraudulently, pawned-off billions of dollars in bonds. Concurrently, the Germans, the Italians and the Dutch are each conducting their own "profound" investigations of Wall Street behavior as it relates to a now-growing list of Wall Street's questionably legal, and certainly unethical, missteps on the continent. But, for the likes of Goldman, JP Morgan, Merrill Lynch and many others under the watchful eye of public prosecutors on the continent -- such as this example of what's happened in Portugal over the past month -- it's just business as usual.
And, how does all of this really translates into what's actually happening with financial reform on Capitol Hill? Nomi Prins explains...
Speculating Banks Still Rule -- Ten Ways Dems and Dodd Are Failing on Financial Reform
AlterNet / By Nomi Prins
April 14, 2010
....Banks -- shockingly -- aren't helping. They posted their lowest lending rates since 1942; despite all the subsidies and cheap money they received from, well, us, including exceedingly low Federal Reserve loan rates (zero to 0.25 percent interest).
That brings us to Bubble Lesson 101, Greenspan and Bernanke edition:
Cheap Money + Intensified Trading = Disaster Waiting to Happen.
Banks are incentivized not to lend. When the Emergency Economic Stabilization Act (which included TARP) was passed in October 2008, it included some fine print allowing the Fed to pay banks interest on reserves (money, or capital, banks are obligated to park with the Fed to back their businesses), and on extra reserves (money they aren't obligated to park). In September 2008, the top banks were required to keep $43 billion dollars in reserve at the Fed, and placed $59 billion in extra reserves. Today, banks are required to keep $63 billion in reserves, but parked an extra $1.2 trillion at the Fed.
Meanwhile, banks are using other federal funds to bolster speculative operations. The biggest banks, such as Bank of America, J.P. Morgan Chase and Wells Fargo, are on a dangerous cycle of higher trading profits and mounting losses in their consumer businesses. In other words, banking businesses that are tied to the real economy are dying, but raw gambling disguised as finance is doing fine. Wall Street is making money by rolling the dice - again. All this risky activity seems to be going unnoticed in Washington. Without major reforms, the next crisis is going to be worse than the last. Because if you pump enough money into anything, it'll look good temporarily, and that seems to be all politicians in either party really care about. But without major reforms, the next crisis is going to be worse than the last.
Today's juvenile partisan antics guarantee no meaningful reform bill will be produced, and mock our own history of bipartisan bank reform. In 1932, Senate investigations into the behavior of banks that precipitated the 1929 stock market crash were commissioned by a Republican Congress under Republican President Herbert Hoover. They continued under Democrat President Franklin Delano Roosevelt and substantive reform was passed, including the Glass-Steagall Act that decisively separated speculative from consumer oriented banks. Equivalent investigations this year are a joke.
While all of this occurred, Prins reminds us what happened on Wall Street last year...
--The top 25 hedge fund managers made a whopping $25.3 billion dollars in 2009. That's a billion dollars per manager!
--The average compensation for Wall Street bankers increased by 27% in 2009.
Meanwhile, back on Main Street...
--2.8 million properties went into foreclosure in 2009; that's 21% higher than 2008.
--4.5 million properties are projected to be foreclosed upon in 2010.
--Bankruptcies rising 35 percent in 2009 rose 35% in 2009 over 2008 numbers.
As Prins also notes, Federal mortgage modification programs aren't cutting it. Reports over the past few days, including this from the NY Times, demonstrate that banks are vehemently resisting the administration's plans to reduce mortgage balances.
It's self-evident, and even being reported as such in the press, that the administration's gloves are coming off. But, even now, they really can't drive this; the rubber hits the road on Capitol Hill, not at 1600 Pennsylvania Avenue; and, the legislative branch of our government offers little more than bloviations; yet, it's up to them to get the job done.
That's still not happening.
As Prins documents it...
Senate Banking Committee Chairman Christopher Dodd's financial "reform" proposal (Barney Frank's wasn't much better) won't change the nature of anything Wall Street does. Dodd's needless watering down of a proposal to create a new Consumer Financial Protection Agency has been well-documented, so here is a list of 10 other problems Dodd's bill will not fix:
1) It won't make the biggest most "systemically important" banks (read: systemically destructive) any smaller...
2) It won't reduce the economic danger from rampant, overleveraged trading activities...
3) It won't change the nature, transparency, size, complexity or usage of the most heinous derivatives...
4) It won't prevent the creation of new toxic assets...
5) It won't contain the risk to the shadow banking system from hedge funds, private equity firms and venture capital funds...
6) It won't remove the conflicts of interest between banks that issue securities and rating agencies that rate them, and get paid a fee for doing so...
7) It won't contain systemic risk...
8) It won't wrest control of our economic future from the banks the Fed couldn't regulate over the past decade...
9) It won't constrain the Fed's future bailout operations...
10) It won't prevent bank failures by separating speculative banking from deposit-insured commercial banking a la Glass Steagall, but instead contains plans for resolving them, after the fact...
Putting it more bluntly than President Obama warned this weekend, Prins concludes...
None of this is reform. We're actually better off with no legislation than we are with this vapid 1,336-page opus--the false sense of security it creates will only encourage greater risk-taking. If the Dodd bill passes in its current version, we absolutely, unequivocally will see another system-wide crash that will invoke greater hardships on the country than the last collapse.
Bold type is diarist's emphasis.
George Washington asked the same questions over at Naked Capitalism (diarist is authorized to reprint Naked Capitalism's posts in their entirety), just yesterday:
Goldman Sacked?
George Washington
Washington's Blog Guest Post at Naked Capitalism
April 17, 2010
...Are the prosecutions finally starting? Is the dam finally breaking? Has Goldman really been sacked?
Maybe.
But Tyler Durden thinks it's all bread and circuses.
And as Mish points out (edited slightly for readability):
Here is a list of some of the things the SEC has ignored.
- Geithner's Illegal Money-Laundering Scheme Exposed; Harry Markopolos Says "Don't Trust Your Government"
- 77 Fraud, Money Laundering, Insider Trading, and Tax Evasion Investigations Underway Regarding TARP
- Secret Deals Involving No One; AIG Coverup Conspiracy Unravels
- Questions Geithner Cannot Escape
- Time To Indict Geithner For Securities Fraud
- Bernanke Guilty of Coercion and Market Manipulation
- Paulson Admits Coercion; Where are the Indictments?
- Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America "Turd in the Punchbowl"
- Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis
We need a complete ethics overhaul but we will not see it until people are thrown into prison and corporations have to choose which business they want to be in as opposed to the current state of affairs where anything for a profit is acceptable.
* Firms give advice based on how much profit the firms will make on it
* Firms trade their own books to the detriment of clients
* Firms make upgrades and downgrades after they take positions themselves
* Firms front-run trades
* Firms engage in dark pools
* Firms deemed too big to fail take advantage by upping leverage
* Firms like Goldman Sachs (which is nothing more than a giant hedge fund with no ethics) have access to Fed funds at low interest rates to do whatever the hell they please
Is someone finally standing up to the vampire squids of the world?
Or is this yet another p.r. stunt, where deals will be cut, some tens or hundreds of millions of dollars worth of fines imposed (a slap on the wrist for a behemoth like Goldman), a few low-level patsies will be convicted, and business as usual will continue?
Only time will tell ...
Yes, Bloomberg gave us the "time will tell" line this past week, too...
U.S. Bank Profit `Imbalances Are Re-Occurring': Chart of Day
By Mark Gilbert
April 13 (Bloomberg) -- Record low U.S. interest rates are boosting the profitability of financial companies, creating the same kind of imbalances that fueled the credit crisis, according to Jim Reid, a Deutsche Bank AG strategist in London.
--SNIP--
"It seems incredible that financials are now scaling their 2006/2007 heights again," Reid wrote in a research note published yesterday. "The dramatic imbalances are re- occurring."
In July 2008, Reid said that U.S. banks had made "excess profits" of about $1.2 trillion in the previous decade, compared with how much they should have made based on economic growth, and that those excesses would be wiped out. Since then, U.S. financial firms have written down the value of their assets by about $1.15 trillion, according to Bloomberg data.
"We are now all well aware that rather than overhaul a financial system that arguably contributed to the problems of the last two to three years, the authorities have created the conditions for the industry to thrive," Reid wrote this week. "Only time will tell how the regulators and politicians will decide to address these imbalances."
Bold type is diarist's emphasis.
Yes, on Wall Street, only time will tell. On Main Street, the clock is ticking loudly...then again, time bombs tick loudly, too.
Call it what you wish: a "Pecora moment," a "FDR moment," whatever. The bottom line is: it's the moment.
The real question is: Will it be ours?