Last Friday I wrote that the debt crisis created by the GOP wasn't as big a deal as our on-going housing and mortgage mess. Specifically, I pointed out that because homeowners continue to be confronted with a legal maze of walls that makes a mess of property rights in America, that the integrity of our market system is threatened.
While the issue of property rights were discussed in the Financial Crisis Inquiry Commission's report (issued January 2011), key references to "deregulation," Wall Street's "shadow" banking system, and how Wall Street misled investors were ignored in a separate GOP minority report. And why not? The intent of the GOP minority report was clearly to place blame for the 2008 market collapse on the government (as I discussed here, here and here).
It turns out that there may have been a very specific reason for GOP commission members to blame the government (specifically Fannie Mae, Sallie Mae, and the CRA) for the 2008 market collapse. By blaming "the government" Wall Street and the banks get a free pass. This is where GOP commission member Peter J. Wallison enters the scene.
According to a report prepared for congress, Wallison may have deliberately tried to sabotage the FCIC report because he was working for, or getting support from, certain financial interests. Barry Ritholtz - CEO, blogger, and author of Bailout Nation - has posted correspondence that he received from a DC lawyer who is familiar with the developments, and suggests that Wallison's efforts may be backfiring.
One of the reasons for this - according to the report prepared for congress - is that Wallison's primary points were not supported by any of the commission members. From page four of the report we learn:
Internal Commission documents indicate that Commissioner Wallison used his position to promote a theory of the economic crisis supported by Chairman Issa and put forth by EdwardPinto, a Resident Fellow at the American Enterprise Institute (AEI). This theory, that government housing policy was the primary cause of the nation’s economic crisis, was ultimately rejected as flawed by every other member of the Commission [my emphasis].
Oddly enough, former Bakersfield congressman, Bill Thomas (also a GOP FCIC commission member), may be the point man for uncovering Wallison's activities. While Bill Thomas is a Washington insider, one of the thing's that pisses him off - and could tear him away from the GOP game plan for the moment - is if he thinks anyone is playing him for a fool.
If Wallison deliberately tried to pull one over on Bill Thomas (by feeding him false or misleading information), and then having Thomas push his agenda forward for his private gain, Wallison could be in trouble. Better yet, if Thomas can punish Wallison by discrediting his position we just might see some progress made when it comes to untangling our Wall Street-created property rights maze (which is critical for discrediting Wallison's position).
I always tell my students "We don't regulate markets. We regulate people." Here's just one of the reasons why we regulate people ...
It appears that the Wall Street firms who sold mortgage-backed securities to investors violated federal securities laws by misleading their clients about the quality of the underlying mortgages. According to the Financial Crisis Inquiry Commission (FCIC) report, not only did "nearly every every cog in the financial system" break down over greed and myopic thinking, but the sellers of securities built on mortgage contracts failed to tell the buyers that the underlying contracts that they were peddling didn't meet their own standards.
The FCIC report - which every republican committee member effectively ran away from when they issued their own half-ass, Wall Street whitewash, report in December - found fault with every major player. Everyone, from Wall Street investment banks to government regulators, to the Federal Reserve, and the hedge funds and credit rating agencies, who kept pumping money into the system, played a role in wrecking our economy.
Ahh, the magic of the market ... brought to us by the nice people on Wall Street, who need to be regulated.
The good folks over at Zero Hedge have done us a favor and provided a list of 21 graphs and charts from the Financial Crisis Inquiry Commission's report on the 2007-2008 market collapse. Here it is. The graphs make it clear that we're still in a mess. Seriously.
Want to know how much Wall Street has been betting on the real goods and services produced in the market? Check out this chart ...
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Note: In market-speak, the bets made (both for and against) on financial instruments, which are listed under "Gross Market Value," is represented by the "notional amount" (of outstanding derivative positions) ... I know, I know. But that's how Wall Street speaks.
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As you can see, the bets on financial instruments (and claims on money) almost hit $700 trillion by 2008. How much is that? Our entire economy is forecasted to produce only about $15 trillion worth of tangible goods and services this year!
One thing becomes clear. After 2004, if not sooner, private investors and the market players on Wall Street began smoking some kind of financial crack.
A preliminary staff report from the FCIC, that says pretty much the same thing as this 600+ page report (and says it in only 42 pages), can be found here.
Three points, for now, should stand out for the Fox News/Republican crowd:
1. Fannie Mae and Freddie Mac "followed rather than led Wall Street and other lenders in the rush for fool's gold" (p. 26)
2. Deliquency rates for Frannie Mae and Freddie Mac instruments were "substantially lower" than those purchased and securitized by other private financial firms (i.e. our "shadow banking" system).
3. By the end of 2008 the mortgages that were securitized by private and Wall Street led investors - again, our "shadow banking" system - were far more likely to be "seriously deliquent" than those from Fannie and Freddie (28.3% vs. 6.2%).
No wonder the Republican "Primer" issued in December ommitted the terms "Wall Street," "deregulation," and "shadow banking." Their political and financial overlords are worried that their greed and gambling would be exposed, and they needed some political cover.
If there's any coverage on this report watch for Fox News and Wall Street's apologists in Washington to point to "discord" and "disunity" on the commission, and then hold up the Republican "primer" as evidence of honest dissent.
- Mark
In December I wrote how the republicans want to absolve Wall Street and their congressional brethren's reckless deregulation policies from blame for the 2007-2008 market collapse. One of the tactics for doing so is to place blame on "the government" while deliberately failing to mention either "Wall Street" or "deregulation" in their reports on the market collapse.
In fact, I called their recently released report, which attempts to to exonerate Wall Street and deregulation, a joke. As a follow-up, I wrote an op-ed piece explaining what the GOP has done. It appeared in the Bakersfield Californian earlier today, which you can find here.
In my last post on the bi-partisan Financial Crisis Inquiry Commission (FCIC) I wrote about Republican commission members. They decided to issue their own report on the causes behind the 2008 market collapse, which the FCIC is supposed to do. I explained why I thought the Republican report - which they like to call a "primer" - was a joke.
In a few words I wrote that Republican commissioners wanting to remove words like "Wall Street" and "deregulation" from the commissions final report was like wanting to remove the words "welfare" and "fraud" from a report on welfare fraud.
I called the commission on December 20th and asked if someone would get back to me on this. The last time I checked, there were no messages on my office phone. But two days later a Republican operative - Peter J. Wallison - did come out with a general response to emerging questions and criticisms.
The Huffingtonpost's R.J. Eskow does an excellent job of taking apart Wallison's nonsense here. Suffice it to say, if you ever wanted to know what George Orwell's "doublespeak" means, or what "looking trough the looking glass" is all about, you want to read Wallison's post and Eskow's response.
Now, if you'll excuse me, I'm going to write a primer on what's been going on with Republican members on the FCIC ...
But I'm going to do it without using the terms "Washington," "politics," "lobbyist," or "influence peddling" - because, you know, these terms are so imprecise.
People on Wall Street and in the media seem to be rather pleased that the U.S. stock market has rallied. It's hovering around 11,000, which is supposed to give us hope for the future. Forgive me for not joining in the celebration, but there are some major issues that need to be addressed. But first, a quick recap of how we got into the mess of 2008.
1. Deregulation
2. A Culture of Debt.
3. Unabated Speculation and Gambling on Wall Street.
Any collapsed market that was built on favorable legislation, excessive debt, and wealth extraction needs to take a step back and reassess. When a plane crashes, we see the government, independent analysts, and private players get together to determine the cause(s) and make recommendations. This kind of diligence and cooperation hasn't happened with reference to the 2008 market collapse (at this time the Financial Crisis Inquiry Commission is stocked with market sycophants, and a waste of taxpayer dollars).
Instead, we've thrown trillions of dollars at the problem, allowed record bonuses, and now have relatively toothless pieces of legislation making their way through Congress.
In effect, we're doing the functional equivalent of the FAA sending up more planes (the bailouts) after a crash, hoping that everyone looks at the number of planes in the air (a surging stock market and a "stablizing" jobs picture), instead of focusing on the carnage that's still on the ground (homes underwater, record debt, stagnant wages, foreclosures, bankruptcies, etc.). Seriously, this is what we have today:
1. No New Regulations.
2. More Debt & Record Bonuses.
3. More Speculation & Gambling ... but now with trillion dollar guarantees from the Federal Reserve.
Throw in (1) the fact that too-big-to-fail is not seen as a serious problem in Washington, or on Wall Street, (2) growing concerns in Europe and China over finance & trade issues, (3) continued real estate problems (underwater mortgages & looming commercial real estate disasters), and that (4) Wall Street seems to think more debt and no new rules are cause for celebration, and we have reason to ask what's really happening in our markets.
No one can know exactly when the s**t will hit the fan, but make no mistake. It will.
I especially like the Hollywood movies Ratigan uses to explain what's happened. Former Federal Reserve Chair, Alan Greenspan, is The Godfather. He makes the banking sector an offer they can't refuse: Virtually free money with carte blanche to do what they want. The banks, and other market players (especially the "shadow banking" institutions), take the money and make unrealistically low interest rate loans across the economy.
And why not? The Godfather, Alan Greenspan, had their back. (Paradoxically, in spite of his hands off "free market" beliefs, Greenspan also believed it was his duty to write blank checks and ignore market corrupting practices to keep the market afloat.)
For their part, American consumers thought the money coming in was "all good" and would last forever. Like Doyle Lonnegan in the Robert Redford movie The Sting, American consumers didn't realize that they were getting their pockets picked, and that the ones doing the picking were the people America trusted to take care of their business - Alan Greenspan and Wall Street (a process I wrote about in early 2008).
Like Doyle Lonnegan, the American taxpayer was footing the bill for the con men (Alan Greenspan and Wall Street) to play and make their bets. When the time for making the real big con (bet) arrived, Lonnegan was again tricked out of his money by a first-class sting operation. In many ways, with the American taxpayer Federal Reserve footing the bill for the low interest rate loans to Wall Street, and with the American taxpayer covering the cost of the bailout for Wall Street, there's little doubt that the American taxpayer has been connned too.
Heads they win, tails we lose.
Still, there's little doubt that America was pleased with the immediate results, and did not worry too much about the future when the game was being played out. And why should they worry? Americans were told over and over again that market players are good, rational people. You can trust Wall Street. Government, on the other hand, was bad. Government regulations were worse. And besides, Wall Street historically returned about 7.5% per year, which would likely go on for eternity (so the argument went).
With this mind-set as America's backdrop, it should come as no surprise that Wall Street's sting operation wasn't such a hard sell. In many respects, we were asking to be fooled.
The end result? Bankers and investors went nuts borrowing and lending, borrowing and lending, borrowing and lending ... well, you get the drill. But it didn't stop there.
The good people on Wall Street took all the newly created debt contracts, repackaged them into high paying securities, and then sold them to pensions and other fund managers. Wall Street effectively marketed them as securities that were as safe as government bonds. With the ratings' agencies and Wall Street financiers working together to make sure the debt looked clean on their computer models, what could possibly go wrong?
Well, we know what went wrong. Because America is chock full of people who have a child-like understanding of how markets work, we got conned. And it's happening again.
Today, no one in Congress seems willing to stand up to get our money back. Part of the reason for this is that they don't understand what the hell is going on either (Republican Ron Paul and Democrat Alan Grayson excluded). Worse, those who helped pull off this scam are too gutless to accept blame because of what it would do to their egos, and their bank accounts. Recent regrets from CEOs, without assuming responsibility, are simply public grandstanding.
As a result, it should come as no surprise that the pieces of legislation making their way through Congress are left lacking (though Audit the Fed is promising).
At the end of the day I don't expect much out of the reform efforts (which can be tracked here). Americans are woefully ignorant about too much of this stuff to push for anything of substance. Our Congress is too dependent on Wall Street lobbyist campaign contributions to stand up for the American consumer. Worse, most Americans - especially the market sycophants in Congress - have bought into a free market mantra that is more fairytopian than grounded in reality. This explains why accountability is missing from our current debate.
Simply put, because the vast majority of Americans still believe in self-regulating markets they don't understand where to begin when it comes understanding the market failure we just experienced (hint, it's not just Fannie Mae or Freddie Mac).
When it comes to understanding how modern markets work we really need to ask whether America has become a nation of ignorant wretches. If we are honest with ourselves I have to believe that the solutions would have become obvious by now ... which, in my view, explains why we're going to do 2008 all over again.
In this NY Times' piece written by Joe Nocera, the author speculates as to why Congress is making such a fuss over the developments that led to the Bank of America-Merrill Lynch merger. According to Nocera, two concerns lie at the heart of the matter.
Members of Congress are concerned that they were bullied and cowed by Wall Street and the Bush administration into giving trillions for an industry that is now reporting billions in taxpayer escorted profits. Making matters worse is that foreclosures and unemployment are on the rise, while the financial sector wants to continue playing by the old rules. Middle America is not happy.
Called to testify include Federal Reserve Chair Paul Bernanke, Bank of America CEO Ken Lewis, and former Goldman Sachs CEO and immediate past Treasury Secretary Hank Paulson.
What we have is one group that is embarrassed and upset that they were gamed, while the other see themselves as maligned and misunderstood saviors. As you can imagine, the perceptions of both groups are no recipe for shedding light on the bailout events under scrutiny. Still, as Nocera suggests, Congress sees a chance to grandstand over the Lords of the Bailout. I agree.
What makes the show constituent-worthy for Congress is that several members believe Bank of America's Ken Lewis either gamed the panic conditions of the times (in December) to get more money for merging BofA with a crippled Merrill Lynch. Others believe they see something else: Lewis extorted money from the government by threatening to pull out of the Merrill Lynch deal, which would have made the panic conditions of the times worse.
According to Nocera, it was at this time that Secretary Paulson and Chairman Bernanke decided to play hard ball with Lewis.
According to one account, Paulson and Bernanke probably reminded Lewis of the easy times his industry had enjoyed from the regulators, essentially telling him, ‘You haven’t had very good capital ratios, and we’ve looked the other way ... Now it is payback time. We’ve let you do deal after deal after deal. Now it’s time to take one on the chin.’ ” According to Nocera, Bernanke and Paulson probably also reminded Lewis that as regulators they could simply fire him.
Still, in spite of their tough guy bravado, to soften the blow of taking on more taxpayer bailout money, Bernanke and Paulson agreed to cough up an additional $20 billion (to be paid back at 8% interest) to placate Lewis.
According to Nocera, by accepting the extra money BofA has now accepted as much overall TARP money as Citigroup, which is the very symbol of a crippled bank. The end result is that the BofA-Merrill Show will do little more than allow members of Congress to say to their constituents, "See, look at me beat up on ___________."
Most troubling for me, though, is that the underlying problems still exist: A bailout culture that breeds incompetence, the same regulatory infrastructure that encouraged stupidity and greed, favorable legislation for a crippled industry, etc. I have no problems with Congress settling scores. But they also need to fix what got us into this mess. Niether the BofA-Merrill Show, nor the recently announced Financial Crisis Inquiry Commission, move us in this direction.
As I suggested in March, we may be setting ourselves up for an Extreme Do Over. Stay tuned.
The NY Times has an editorial that questions the strength of President Obama's "re-regulation" efforts. Specifically, the editorial makes it clear that his efforts have emerged with an "inauspicious start."
Anyone who follows this blog knows why I would consider this to be a very generous assessment. In my view, we're doing very little to discipline market stupidity and greed. In fact, it's being rewarded under the Bush-Obama plans.
Making matters worse is how the Financial Crisis Inquiry Commission is made up. This investigative body, in the spirit of the 1930s hearings led by Ferdinand Pecora, was created by Congress to perform an autopsy of the collapsed financial institutions, and to look into the conditions that led to the market meltdown. As Robert Kuttner points out, early indications are that the commission will be stocked with the same market sycophants who made the mess possible.
If early reports are correct, and people like former representatives Jake Garn (R-UT) and Bakersfield's Bill Thomas (R-CA) are on the commission, the commission promises to be little more than an apologetic rubber stamp for Wall Street's behavior. I write about Garn's role in helping to create the financial mess in my book (see page 253).
For Bill Thomas' part, he rarely met a financial, oil, or agricultural group that he wouldn't support with taxpayer subsidies and favorable legislation. Why would either one of these two want to step up and find fault with the deregulatory legislation that they helped craft?
Put another way, the commission will be both toothless and gutless. The financial sharks will live to see another day.
- Mark
P.S. This post by former Labor Secretary, Robert Reich, explains why President Obama's plan for reforming Wall Street comes up empty. It's short and to the point.
