Yea, though I walk through the valley of the shadow of death, I fear no evil. But Tim Geithner scares the hell out of me.
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Rage Against the Street
Posted on October 23, 2009 by mguimbarda
With billion dollar bonuses and boundless arrogance, Wall Street bankers have accomplished a feat that has eluded politicians for nearly seventy years: they have unified American public opinion. Not since the Japanese bombed Pearl Harbor has the American public expressed such universal outrage over a single event or issue.
Their anger is justified. American families and businesses are suffering in the worst economic recession since the Great Depression. Unemployment is near ten percent, and that’s not including people who have simply given-up looking for a job. Some experts estimate the real unemployment rate at nearly sixteen percent. Many families continue to lose or remain in fear of losing their homes, incomes or health insurance. Even credit-worthy small businesses have difficulty obtaining credit and those that do pay a high price for it. In the midst of this economic pain and anxiety Wall Street’s highly publicized bonuses are unconscionable, and the fact that it’s being done with taxpayer assistance is salt in the wound.
A New Game
Once upon a time, investment banks and commercial banks earned profits by facilitating commerce and helping companies and government raise capital. They provided credit to finance the purchase or sale of goods produced by American companies. They provided letters of credit so that American companies could buy and sell internationally. They underwrote and sold stocks and bonds to finance the expansion of American industry and enable federal, state and local governments to build roads, bridges, sewers and other infrastructure necessary for economic and social progress. They made real and substantial contributions to the growth of the American economy
But that was then. Over the past twenty-eight years our Wall Street institutions have moved toward a new business model. They still earn profits from financing commerce and raising capital for industry and government, but a much greater share of their profit is earned from trading securities and financial derivatives, and lending money to hedge funds that trade securities and derivatives. Much of this trading activity has no underlying business purpose, other than to make money, and does nothing to contribute to real economic growth. No product is produced or service rendered; they are merely electronic transactions between buyers and sellers. A teenager working for minimum wage in a pizza parlor contributes more to overall economic growth than a hedge fund manager.
In the process of shifting to this new business model, bankers have abandoned the principals of sound financial management practiced for decades by their predecessors. Not only are they engaged in the trading of derivatives and financing hedge funds, both of which carry far greater risk than trading stocks and bonds, their traditional bailiwick, but they have increased their financial leverage to dangerous levels. Even a moderate market hiccup can threaten a firm’s survival.
A Growing Risk
Wall Street’s new business model poses a substantial and growing threat to our financial security. Derivatives are highly complex financial instruments that the CEOs of firms that trade them or hold them on their balance sheets do not even understand. They are essentially “bets” on financial outcomes rather than investments based on sound financial analysis. Warren Buffet has referred to them as “weapons of financial mass destruction”. In spite of its inherent risk, growth in derivative trading, much of which is done by hedge funds, has exploded in recent years. While no one knows for sure the value of derivatives on world markets, the Bank for International Settlements estimates it at $680 trillion, more than ten times the combined GDP of all the worlds’ nations.
If hedge funds were risking their own money, there would be no problem. Unfortunately, it is our money they are playing with. As long as banks or insurance companies finance hedge funds or hold derivatives on their balance sheets, they are at risk. That risk ultimately falls to taxpayers, as most of these institutions are deemed “too big to fail” and indeed they are. Because these institutions are so interrelated, the failure of one threatens the survival of all. Failure of the financial system would be catastrophic for world economies: business and consumer credit would dry-up, commerce would come to a screeching halt and the world economy would collapse. The impact on world order and national social structures would be unpredictable, but dramatic.
How Did We Get Here?
Americans understandably point the finger of blame directly at Wall Street bankers for the current situation but, in fact, most of the blame rests in Washington. Since 1980, our elected officials, Democrats and Republicans alike, have actively participated in the systematic destruction of the financial regulatory apparatus first established with passage of the Glass-Steagall Act in 1933. More importantly, they have failed to respond to changes in the practices of financial institutions with new regulation. For example, hedge funds and derivative trading, in spite of the risk they pose to our financial system, are completely unregulated. Former Federal Reserve Chairman Alan Greenspan, who believed that markets would regulate themselves with minimal government intervention, provided politicians with political cover in this effort. There is no doubt that Chairman Greenspan was genuine and well-intentioned in counseling Congress, but he has since admitted that he was wrong.
The political influence of Wall Street has been a major factor in creating the freewheeling environment in which these firms now operate. Their campaign contributions and the occupation of key Treasury and Federal Reserve policy-making positions by Wall Street veterans assure their control over industry regulation. Since these policy makers will likely return to Wall Street at the conclusion of their government service, they have a vested interest in protecting the Wall Street status quo.
The Government’s strategy for rescuing the financial system after the 2008 financial crisis was designed by Wall Street veterans and, incredibly, it has left the financial system even more vulnerable than it was before the rescue. Wall Street firms are engaged in the same greed-driven practices that created the crisis in the first place and, if they were “too big to fail” before the crisis, they are even bigger today after several resultant mergers.
Fight Back
It is time for our elected officials to stand up to this growing threat and say “no more” to Wall Street influence. Populist rhetoric and efforts to limit the compensation of bankers might assuage the public lust for Wall Street blood, but they are worthless in terms of addressing the real problem. Meaningful regulation is needed to eliminate the threat of financial extinction posed by financial derivatives and limit the activities of Wall Street institutions to those that actually contribute to the economy. Additionally, Congress must force the downsizing of Wall Street institutions to a “not too big to fail” status. Sadly, none of this is likely to happen unless we, as citizens and voters, demand it.
Filed under: Economy, Financial Regulation | Leave a Comment »
Justice Denied
Posted on April 2, 2009 by mguimbarda
Prosecuting attorneys at all levels of government advance their careers by securing convictions. It is not surprising, therefore, that some prosecutors might bend the rules of justice in order to obtain convictions. The inevitable results of this condition are the occasional convictions of innocent people and an erosion of public trust in our justice system.
This problem has been highlighted in recent years as a number of previously convicted people have been released from prison upon the discovery of exculpatory evidence. In some cases, prosecutors were aware of this evidence but failed to bring it to the attention of the defendant’s attorneys. They usually continue to insist upon the guilt of the individual in spite of evidence to the contrary. The prosecutors point to the fact that the defendant was convicted by a jury of his peers, ignoring the fact that the jury deliberated on incomplete evidence.
Yesterday it was revealed that, in the recent corruption trial and conviction of Alaska’s U.S. Senator Ted Stevens, prosecutors withheld potentially exculpatory evidence from Steven’s attorneys. Citing these circumstances, U.S. Attorney General Eric Holder has asked a federal judge to drop all charges against Stevens, whose conviction is currently under appeal.
The Stevens case represents an unconscionable betrayal of the public trust on the part of federal prosecutors. Americans of every political stripe should be appalled at this behavior. Whether or not you agree with Stevens politically, he was a duly elected representative of the people of Alaska and would unquestionably still hold his senate seat except for this prosecution. As it is, he lost his re-election bid by just one percentage point.
These prosecutors have determined the outcome of an election for the U.S. Senate. Their actions are no less sinister, no less criminal, than those of Illinois Governor Rod Blagojevich in attempting to sell a U.S. Senate seat. They should be disbarred and face criminal charges of their own.
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Lies, Damned Lies, and Politicians
Posted on March 25, 2009 by mguimbarda
Before taking office, our government officials (both elected and appointed) take an oath of office. We know this because we frequently see them do it on TV. Members of Congress do it en masse. Over the years I have become convinced that there is a second oath. It is a secret oath, one that they take outside the view of TV cameras and away from the public eye. It goes something like this:
I, (state name here), do solemnly swear, that in my duties as an (elected/appointed) official of the (United States/state) government, I will, at every opportunity, wax eloquently on topics of which I have no knowledge. I will constantly strive to obscure any truth or conceal any fact that does not support my political views. When asked for my position on important issues, I will equivocate. Above all, I will never, under any circumstances, provide direct answers to questions asked. So help me Richard Nixon.
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Geithner: Stop Him Before He Kills Again
Posted on March 24, 2009 by mguimbarda
Treasury Secretary Geithner’s record in dealing with the “credit crisis” has been less than impressive. His Wikipedia page indicates that Mr. Geithner played a pivotal role in the bailout of AIG. We all know how well that went. Now, the Treasury department, under the direction of Secretary Geithner, has introduced its public-private plan to purchase $1 trillion of troubled assets from ailing US banks. This plan is little more than a rehash of the plan proposed months ago by the Bush administration, which even the Bush administration had sense enough to abandon. Treasury’s plan, presumably the brainchild of Secretary Geithner, places disproportionate risk on taxpayers and is unlikely to achieve President Obama’s stated goal of producing a substantial increase in bank lending activity
As usual, administration officials have been vague on the details of the plan. What is clear is that taxpayers will be putting up more than ninety percent of the funds required to purchase the assets in return for something less than ninety percent of the potential profit. The taxpayer’s share of any potential losses remains unclear at this point, but a good guess would put it at something greater than fifty percent. Whether or not taxpayers are to receive interest on the loans provided to purchase the assets is also unstated at this point. It is not surprising that markets rallied on the news of this plan. In general it seems like a great deal for private investors and a questionable one for taxpayers.
The Bush administration backed away from its own proposal because of concerns in Congress and among the public that the Government would end up paying too high a price for the purchased assets. The plan proposed yesterday by the Treasury department offers no improvement over the Bush-Paulson plan in this respect. In fact, the only way any asset purchase plan can work is for the purchaser to pay more than the current market value for the purchased assets. Otherwise, the banks may be forced to take additional write-downs on these assets creating losses that would further erode their capital. Many would argue that the assets are worth more than there current market value. That may be true, but it depends completely on unknowable future events in the real estate market and general economy. What is certain is that Treasury’s plan would shift the risk of those unknowable future events to taxpayers while providing a financial boon to the managements of these financial institutions and their stockholders
The hope, expressed by both President Obama and Secretary Geithner, that this plan will significantly increase the flow of credit from US lenders reveals an alarming lack of understanding of credit markets. To be sure, removing these troubled assets from the balance sheets of the banks will markedly improve their financial condition, but lenders will still be faced with an economy in deep recession and many consumer and commercial borrowers who cannot make their scheduled loan payments. As long as lenders remain uncertain about the ability of borrowers to repay, they are unlikely to ease the flow of credit significantly. To do so would only create more troubled loans to replace those that they sold.
Secretary Geithner should reconsider this new proposal and find another way.
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