Volatility

November 9, 2009

Bank Roundup 11/9

1. The week’s most important story was every week’s most important story, the jobs front. The new federal report was devastating:
 

With the release of the jobs report on Friday, the broadest measure of unemployment and underemployment tracked by the Labor Department has reached its highest level in decades. If statistics went back so far, the measure would almost certainly be at its highest level since the Great Depression.

In all, more than one out of every six workers — 17.5 percent — were unemployed or underemployed in October. The previous recorded high was 17.1 percent, in December 1982.

This includes the officially unemployed, who have looked for work in the last four weeks. It also includes discouraged workers, who have looked in the past year, as well as millions of part-time workers who want to be working full time.

The official jobless rate — 10.2 percent in October, up from 9.8 percent in September — remains lower than the early 1980s peak of 10.8 percent.

 
The failure of the banks and the bailouts is manifest, absolute. No one’s even trying to argue that things could be worse if we hadn’t wasted all our resources, shot our last bolt, to bail out a handful of high-rolling gamblers instead of using that money for direct stimulus at the pyramid’s base, Main Street.
 
We don’t need the big banks. We never did. We didn’t need to bail them out. We’d be vastly better off if we hadn’t. 
 
Think of what $24 trillion worth of direct investment in America could have accomplished, instead of throwing it away to prop up the insolvent rackets. No greater crime has ever been committed in American history.
 
Meanwhile, in Europe they’re coming to realize that we don’t “need” these big bank structures for anything. RBS, Lloyd’s, and Northern Rock are all being forced to divest chunks of themselves as the price of their bailouts.
 
It’s not anywhere near perfect, but it’s a meaningful start. It shows governments which aren’t completely corrupt, and an ability to learn from experience. Both are clearly dead in America.
 
2. Instead, America continues to burn itself alive. After all we’ve been through, what’s the overriding impetus in Congress? Not to enact reform, but to gut what little regulation does exist.
 
The target this week was the Sarbanes-Oxley accounting reform law.
 

Sarbanes-Oxley was passed, almost unanimously, by a Republican-controlled House and a Democratic-controlled Senate. Now a Democratic Congress is gutting it with the apparent approval of the Obama administration.

The House Financial Services Committee this week approved an amendment to the Investor Protection Act of 2009 — a name George Orwell would appreciate — to allow most companies to never comply with the law, and mandating a study to see whether it would be a good idea to exempt additional ones as well.

 
By today’s standards the enactment of S-B sounds nothing short of miraculous. Passed by a large bipartisan majority just five weeks after the Worldcom scandal broke, today it sounds like the Simpsons episode where Lisa’s letter of disillusionment ends up getting her corrupt Congressman stung, arrested, indicted, and expelled from Congress all on the same day.
 
They’re going to exempt all companies worth less than $75 million and mandate a “study” to justify exempting those under $250 million. The fraudulent pretext is that reality-based accounting is too onerous for “smaller” firms, when in fact by now everyone is used to it and has no problem with it other than that it forbids them to lie.
 
The hostility of Congressional Dems to responsible accounting standards is epidemic. These are the same criminals who forced the FASB to gut mark-to-market and replace it with the so-called “mark-to-management” fantasy-based measure.
 
 
Another failure of the rule of law was reported by the NYT’s Gretchen Morgenson on Sunday, as she described how the holders of auction-rate securities have been left unable to redeem them as the vaunted “auctions” failed early in 2008.
 
Towns, student loan racketeers, tax-exempt structures like hospitals, and others issued these securities, whose interest rates were supposed to be set by weekly auctions, where the securities would be bought and sold.
 
Now that the music stopped, the auctions failed, and the end holders were left stuck with garbage paper, they’ve been trying to sue the brokers. But except in a few states who take regulation seriously, they’ve gotten nowhere.
 
This is because of the Private Securities Litigation Reform Act of 1995 (a gift of the Clinton/Emanuel NAFTA policy). This “law” sets up a Catch-22 whereby in order to have standing to sue certain kinds of finance sector con-men, you have to demonstrate a priori the specific information you can usually obtain only during discovery at trial. It’s a legal trick to place certain crimes beyond the reach of the law. Worthy of Kafka.
 
The law is working the way the Republicans and Democrats intend it to work. So far 23 class action suits over these auction rate securities have been dismissed. In fact, complainants are having better success in the privatized arbitration system set up by the industry itself.
 
 
Finally, as another contrast between the semi-serious Europeans and the childish/psychotic Americans, at the recent G-20 conference in Scotland Gordon Brown suggested some kind of Tobin tax to insure against systemic crashes. Geithner at first strongly objected, eventually grumbling that he wanted to wait for the IMF’s recommendations due next Spring.
 
Hey, don’t be too hasty. No hurry.
 
3. Floyd Norris called it “the worst idea of 2009.” Indeed, it was so bad an idea that even the Treasury Dept rejected it. But it was typical for the bank rackets.
 
This typical idea was that Goldman Sachs would buy tax credits from Fannie Mae at a discount. Because FNM is an utter ward of the state, it doesn’t have even the potemkin profits which could enable it to use a tax credit.
 
But Goldman does have these phony profits (all of it from speculation and manipulation using free Fed money), so it wanted to screw its taxpayer benefactor again by buying the credits. The obnoxious justification from the taxpayer point of view was supposed to be that this would help Fannie’s balance sheet.
 
But since they’d pay a discount and then redeem the full value of the credit, the transaction would constitute a loss to the taxpayer. That’s typical bank gratitude for you. As I said, even Treasury was too embarrassed to allow this. (BTW, cuddly supposed non-bad guy Warren Buffett also wanted in on this scam.)
 
(As Norris points out, the existence of this tax credit is also an example of how alleged capitalist “efficiency” is really corporatist looting and political cowardice. The point is to stimulate investment in low-income mortgages. It would be much cheaper for the government to directly subsidize this goal. But using rentier middlemen allows some loot to be stripped and absolves the government of having to make an “expenditure”, thereby avoiding some of the political hassle from the anti-spending shriekers, who are really only concerned about conveying the loot. The leaseback scheme I wrote about last week, which is now blowing up, is another example.
 
Here you see examples of how structurally based policy and reform is not only morally sound but pragmatically less expensive and more effective. The same principle applies at every level, especially the biggest and broadest.)
 
Goldman cut quite a figure in the media this week. The McClatchy stories detailed how Goldman systematically sold securities it was betting against at the same time.
 

In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.
Goldman’s sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation’s premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman’s failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws…….

McClatchy’s inquiry found that Goldman Sachs:

Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders that became the subjects of FBI investigations into whether they’d misled borrowers or exaggerated applicants’ incomes to justify making hefty loans.

Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.

Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages anyway because Wall Street made it easy for them to qualify.

Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several other Goldman alumni.

 
They bought the mortgages from predatory lenders, securitized them, moved them around to evade the law, aggressively foreclosed on the hapless victim borrowers, got a customized bailout (Lehman allowed to fail; cushy all-upside bank holding company status (where they were never held to the restrictions); a direct $12.9 billion giveaway laundered through AIG), $23 billion altogether in bailouts, heading past $50 billion in 09 revenue, $20 billion for “bonuses”, and God is specifically on their side. Pretty good.
 
No wonder they lost money only one day in Q3, and only twice in Q2. (God must’ve been having a bad day.)
 
The McClatchy piece includes plenty of debate on the legalities of Goldman’s securitization scam. It just goes to show how corrupt the law is. Any normal person would look at this and immediately agree with economist Laurence Kotlikoff, “This is fraud and should be prosecuted.”
 
4. As always, there were plenty of antics that transcended normal rent-seeking and reached the level of derangement, as these criminals lose all sense of restraint even for the sake of political show. I already discussed some of them here.
 
One new outrage was how Goldman, JPM, Citi and others were blessed with allotments of the scarce H1N1 vaccine.
 
As Naked Capitalism’s Yves Smith put it:
 

It should come as no surprise that those at the top of the food chain get preferential treatment on all levels. But this still stinks to high heaven. Employees of the Goldman, the Fed, Citigroup, and other banks are getting H1N1 vaccine allotments out of proportion to what can be justified from a public health standpoint. In particular, Goldman has gotten more than Lenox HIll hospital, which needs it not just for the sick but more important, for workers (not only does the public need to keep front-line health care workers in as good shape as possible, but if they get the infection, they become disease vectors fast, given the number of people they see).

 
Healthcare workers are supposed to dispense these only according to CDC guidelines for high-risk groups. But it’s absurd on its face to think these rentiers won’t, if they think it helpful, expropriate these allotments the same way they do every other resource. That’s what they do, period. You cannot regulate them.
 
Of course, private corporations should never be dispensation nodes for a vaccine. Even now there are plenty of public nodes available. So clearly the only reason to do this was to politically satisfy the likes of Goldman.
 
(Besides, if you were really going to use a company in good faith, wouldn’t you repose the allotments at a factory or some other place where real American workers could benefit from it, rather than the utterly worthless, utterly expendable parasites at Goldman?)
 
5. Is there any there there for the real economy regarding the stock market’s rally? Not according to a new post by George Washington. He comments on a Daniel Gross Slate piece which finds that the domestic fundamentals don’t justify the stock surge. Domestic consumption and revenues are down.
 
Instead, multinationals headquartered in America are collecting the bulk of their profit overseas. The Dow, the NASDAQ, the SP 500, are weighted toward big globalized corporations, not Main Street. They’ve saturated the domestic market; in recent years “growth” has been overseas. So the stock market could be a good Main St indicator only via trickle-down.
 
Gross: “It could be that the notion the stock market is an accurate gauge of the domestic economy’s temperature is outdated”.
 
Yes – the market rally is a Big Lie. The discrepancy is yet more proof for the already-proven fact that globalization does not benefit America.
 
It was always a bald lie that it would benefit American workers, and as we’ve seen in recent years its alleged benefit to “consumers” was also illusory. The American consumer was a construct of debt. Now that exponential debt has collapsed, this consumer has blown away in the wind.
 
(Walmartization was always conceptually incoherent when it claimed you could smash the worker yet still keep the same person as a healthy consumer. For some incomprehensible reason a lot of otherwise intelligent people tried to believe this manifest impossibility.)
 
The globalization scam was never anything but another form of the trickle-down scam. Yet even liberal economists mostly blathered about how it was “good for the economy”.
 
But all this ever proved is that there’s no such thing as the economy. Cui bono.
 
6. To wrap up with something stupid from MSMland. This NYT article describes the cultural reaction in the finance and business world to the recent insider trading busts.
 
But instead of taking the tone that if the law is being enforced then criminals better stop committing crimes or at least be more careful, the piece basically depicts them as decent people now caught up in a Kafkaesque labyrinth.
 

For executives in these two worlds, passing along information and gossip is a way of life and a necessity for business. But many executives have begun watching their words in recent weeks. Authorities who sounded an alarm for corporate America now publicize their use of tools like wiretaps and confidential informants once reserved for mob kingpins. That has given even simple conversations a maddening new complexity….

Nathan J. Muyskens, a government enforcement lawyer at Shook, Hardy & Bacon, said that clients had been asking him if they should send companywide e-mail messages reminding people not to say anything questionable, even a joke, on the phone. He said he told them they should…..

“I’ve heard that there have certainly been memos going out: ‘Think of the phone just as you think of your e-mail these days,’ ” he said. “We always say, ‘Think of that e-mail as being on the front page of The New York Times before you hit the send button,’ and now it’s exactly the same for the phone.”…..

Mike Kwatinetz, a former Wall Street technology analyst and now a venture capitalist at Azure Capital Partners, said that when a company recently considered going public, he scheduled sessions with lawyers to train the board and executives about what they could and could not say.

Many venture capitalists have told him that when one of their portfolio companies goes public, they immediately resign from the board because they are worried about the legal ramifications of serving on the board of a public company…..

This newfound caution may continue for some time.

“At least for a few years, when operating executives are having dinner with friends and lovers who work in hedge funds, they’re going to be way more careful about what they say,” Mr. Marks said.

 
No:
 
1. If the law is being enforced at all it’s only because their criminality knows no bounds.
 
2. If they don’t like it, tell them to stop being leeches and get real jobs. 
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6 Comments

  1. $24 trillion? I don’t think the banks have received that much. Did you mean $2.4?

    Comment by jake chase — November 9, 2009 @ 9:54 am

  2. I was referring to Barofsky’s figure for the total potential exposure.

    I know that number was hotly disputed, but not by anyone I’d trust over him.

    Nor do I think it’s unlikely that this administration would push things to the maximum which was politically possible if they thought it was necessary to prop up Wall Street.

    So I go with the Barofsky number as a sort of “ideal bailout” in the intentions of the bailout’s crafters, and here I was contrasting that with an ideal rebuilding of America instead.

    (Not that I think anywhere near that figure would actually be necessary to improve things, or that $24 trillion more could ever be printed up and “eased” out by the government under any circumstances anyway.)

    Comment by Russ — November 9, 2009 @ 11:06 am

  3. Excellent post. The nation’s ruling elite are destructive monsters, and apparently most everyone else, present company excepted, are willing sheep awaiting slaughter.

    Comment by Edwardo — November 9, 2009 @ 2:01 pm

    • So the job at hand is to educate, and to get people to at least do the things we can do tight now, which would mostly be getting our money out of the big bank system, out of their debt clutches, simplifying our lives, rendering them more robust.

      Doing all this on an organized basis, and using that as the foundation for further action, depending on what looks doable.

      Comment by Russ — November 10, 2009 @ 4:42 am

  4. […] Bank Roundup 11/9 « Volatility Towns, student loan racketeers, tax-exempt structures like hospitals, and others issued these securities, whose interest rates were supposed to be set by weekly auctions, where the securities would be bought and sold. … Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks , often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. Read the original:  Bank Roundup 11/9 « Volatility […]

    Pingback by Bank Roundup 11/9 « Volatility « Offshore loans, banks, money — November 9, 2009 @ 3:59 pm

  5. […] […]

    Pingback by Where’s the Midget? « Volatility — January 15, 2010 @ 3:55 am


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