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Beating Wall Street

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bailoutFor over 30 years, the financial industries have been quietly waging a campaign to overturn all of the Depression era reforms. Bit by bit, they ate away at the regulations and even at the idea that Wall St. needed regulations. So good was their campaign that everyone, from Carter onward, believed them. Really believed them. Everyone believed that Wall St. guys were the smartest guys in the room…and if that wasn’t enough, they sent many of their brightest stars to Washington. And they spent billions on legislators and staffs to roll back regulations. They were – and still are – an equal opportunity buyer. They didn’t care who ran the show in Congress, just as long as they got what they paid for: loose or no regulation.

Depending upon party affiliation, everyone likes to think the cause of the meltdown was poor people buying homes they couldn’t afford. That’s true, but only so far as they believed the mortgage gurus who told them they could. Greece and Jackson County, AL, are excellent examples of how financially naive people, when faced with a slick financial salesman and a corrupt intermediary, succumb to the worst deals. Deals that destroy the buyer’s life and, ultimately, wreck the economy.

And if that kind of lying wasn’t enough, mortgage companies targeted the middle class telling them they could refinance or take out seconds with no repercussions. What those homeowners didn’t know was that they were being conned, building up more debt on their homes in interest and fees as well as the loan than they could possible afford.

Then, those loans were packaged up and sold to Frannie and Freddie. Those quazi-government entities gathered them up and resold them to Wall St. When the repackaged mortgages hit Wall St, firms like GS and Lehman’s Magnetar sorted them out and repackaged (sliced and diced) them again spun out in CDOs as if they were going out of style. And when collateralized DEBT obligations ran out, they began selling even more risky collateralized equity obligations which led to synthethic CDOs, a product that was totally made up out of thin air. Then, to hedge their bets – just in case the housing market fell (prices fell), they bought, mainly from AIG’s financial products division (run by a guy who knew zip about the market and only about how he looked to management in the market heyday), credit default swaps (CDSs). Essentially, AIG insured all those phony, misleading and worthless CDOs. Of course, few at AIG knew they were worthless…and even when the guy running the FP division was told, he refused to believe it. He only saw how much money the company was making and refused to see the risks.

Once the market began to crumble because prices got too high and buyers stepped back, housing prices began fall and foreclosures began, notes were called due. AIG got stuck with billions in insurance payments. Banks refused to lend to each other because they couldn’t be sure they’d get their money back. A run on the banks occurred not by depositors but by banks. Financial markets froze.

Bernanke, Paulson and Geithner stepped in and began creating mergers, growing already too large banks into mega-banks. Banks that now control well over 60% of US GDP (some estimates put it as high as 67% or 70% of GDP). Then to add insult to injury, the banks got the SEC to drop mark to market pricing, meaning that the banks no longer had to price those toxic assets (loses?) to current devalued market rates but could price them at the price they bought them…or higher. With that tactic and Repo (as in Repo 105) they’ve been able to make their balance sheets look healthy…again scamming the country, from investors to DC to ordinary voters. Meanwhile, they continue to sell CDOs on any product or market they can find, from life insurance to movies, and pay themselves 50% on each and every deal they make.

Is it any wonder they have more money than God to throw at Congress to get their will done? Is it any wonder that members of Congress bend when those six mega-banks – the TBTF banks – say they’ll effectively shut down the financial markets if they don’t get their way?

Teddy Roosevelt stuck out and struck out hard at JP Morgan when he was threatened with the same result, but he went ahead anyway. He knew what was right for the American people and for capitalism so he fought the monopolies and won, breaking them up into manageable, competitive pieces.

When the Depression hit, it was the result of bank overconfidence and speculation in the market (an “it’ll never go down” attitude, just as modern day bankers thought housing prices would never go down). Just as in the 20’s, modern banks leveraged themselves well beyond reason and couldn’t pay off when “payday” hit as a result of other banks wanting their money back, rather than depositors as in the bank collapse of the early ’30s.

As all this market collapse occurred, no one in DC could believe they’d been so wrong, and no one still wants to admit error. Look at the memoirs of Paulson or the statements by Greenspan…or even the mild mannered approaches of Geithner, Bernancke, and Summers.

None of them wants to admit that the financial markets ran amok under their watch. They cannot admit they were wrong in believing the “free” financial markets could police themselves…to use Ayn Rand’s words, no logical business person would anything to harm the business because he would be hurt in the long term.

Obviously, she didn’t count on the shysters that flocked to Wall St for a “get rich quick and get out of here” scenario. Nor did she count on the ideology that having piles upon piles of money beats everything else in life. Unfortunately, politicians from Reagan to Greenspan…even to Republican Rep Ryan believe her ideology. Humans are not necessarily logical, rational beings. Sometimes they’re just greedy and selfish and egocentric.

The truth is DC, en toto, was captured by the Wall St mystique. No politician captured by that mystique is going to admit his judgment erred. Political egos can’t admit errors.

So here’s the deal, the Dodd bill – actually a bill negotiated between Corker (R) of TN (who wanted a cutout for PayDay lenders) and Warner (D) of VA after ranking member Shelby (R) of AL, who wanted exceptions for car dealers, payday lenders and a bunch of other financial lenders, walked out of negotiations – doesn’t do much of anything to control unregulated derivatives or end the TBTF banks. It puts “systemically important banks” into the hands of regulators – yes, those very same regulators who failed so miserably the last decade – the power to shut down TBTF banks, if they decide shutting down the banks is appropriate. There’s nothing that says they absolutely have to shut down those banks. It’s left to their discretion. No accounting for regulatory capture.

The Resolution Authority has the ability to wind down any bank before it crashes, fire management, and wipeout shareholders. A $50 Billion fund, paid by banks and held at the FDIC, is meant to protect bank assets should the bank start to go under, but it does nothing to mitigate an event as was seen two years ago when numerous banks began to fail. $50B might cover one bank, but not six megabanks. Numerous financial experts from Simon Johnson to Kansas City Fed Pres. Hoenig say the megabanks need to be broken up. At the very least the fund needs to be around $500 Billion.

The real solution is that TBTF banks need to be broken up to smaller pieces. Those banks say they and the US will not be able to compete internationally…or that they’ll be forced to move overseas. But foreign governments are already breaking up and downsizing their TBTF banks. So where are they going to go?

The second major regulatory problem is dealing with derivatives transparency. Banks don’t want everyone to know the value of those products because it might drive prices down, but the only way to know the true market value of those products – which by the way do hold some value to producers who are attempting to hold down their costs, like wheat farmers on gas prices – is to put them on an open, transparent market. Wall St. doesn’t want to do that because they couldn’t set prices, regardless of value or the going rate.

Senator Lincoln announced her Agriculture Committee’s bill to regulate those derivatives today. According to Lincoln, the derivatives will be put on an exchange – hopefully, a clearinghouse exchange – which will allow transparency in price as well as allow the clearinghouse to see in real time what’s going on in the market before another crisis. The only derivatives that would be exempted are those bought by end user businesses who use the products to help control price vagaries, i.e. the wheat farmer trying to control what he pays for gasoline.

So far, the mega-banks have been able to get Republicans in line because Republicans want more than anything – well beyond what is good for the US – to win the next election and to attain that “money bomb” from lobbyists and corporate donors.

In the final analysis, it all comes down to money. Who has it and who can get it. The rest of us, the financially illiterate voters, be damned. And Frank Luntz is right there telling Republicans what to say (we’re on your side; TBTF banks will get endless bailouts; these regulations aren’t good enough; we weren’t included; it’s a partisan bill; we were locked out; etc) to win the hearts and minds of gullible voters, even while Republicans, at the same time, are cheerleading bankers on to fight against reform, telling them that they stand behind the banks against reform.

On the same day McConnell stood in the well of the Senate to denounce the Dodd bill saying it would enshrine endless bailouts, he and John Boehner met with Hedge Funds managers, telling them Republicans would fight against any regulation of derivatives.

Dodd’s bill is a long way from perfect. Leverage limits are not firm; they’re left up to the regulators. Too much discretionary ability is left to regulators, and who’s going to watch the regulators? Who’s going to keep regulatory capture from influencing their decisions? The wind down fund is not nearly large enough, but the Resolution Authority will be able to take action to wind a bank down well before a crisis occurs and put it through a fast bankruptcy procedure. But the TBTF banks are left in place and they need to go. They’re too systemically dangerous to the overall economy.

Yes, a lot is wrong with this bill, but it can be fixed when it hits the Senate floor. And it should be. Good, solid Financial Regulation is necessary to ensure this country and the world never has to go through what we have these last two years. And without regulation, the country will experience another financial market crash. Some say that without solid regulation another crash could potentially happen in as little as six years.

If American voters fall for the Republican spin, written by word spin master Frank Luntz, our economy, our businesses and our families will continue to be at the mercy of an out of control Wall St. The voters must not fall for Republican spin. Voters must demand the Dodd bill be fixed with even stronger regulations and passed this year.


Written by Valerie Curl

April 17, 2010 at 8:54 AM

Unemployment extensions halted to get deal for lower estate taxes

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According to E.J. Dionne in Real Clear Politics, the unemployment benefits extension was halted because two senators wanted estate taxes for a few very wealthy individuals reduced.

let’s examine the Senate debate over whether to extend unemployment insurance coverage. The matter is rather urgent for jobless workers because 1.1 million of them are scheduled to lose their benefits this month, and 2.7 million are slated to lose them by April.

Sen. Jim Bunning, R-Ky., has put a hold on the extension bill, but one of the key reasons the measure is blocked is the effort of Sen. Jon Kyl, R-Ariz., to use it as a way of forcing a cut in the estate tax. Kyl is essentially leveraging the unemployed to get a deal on estate tax relief that would cost $138 billion over the next decade, according to estimates by the Center on Budget and Policy Priorities. The estate tax has already been cut sharply, so the reduction Kyl is pushing along with Sen. Blanche Lincoln, D-Ark., would affect the estates of fewer than three out of every 1,000 people who die, according to the Tax Policy Center.

The proposal helps estates worth more than $7 million in the case of couples. I guess struggling millionaires deserve the same empathy we feel for those without a job.

And notice this: Especially in the Senate, what passes for “bipartisanship” too often involves a Democrat such as Lincoln allying with a Republican on behalf of the wealthiest interests in the country. And we’re supposed to cheer this?

The U.S. is running the largest deficits in history, trillions in debt, can’t get reasonably priced health insurance, home prices underwater, nearly record foreclosures, and 9.5% unemployment…and these Senators think that getting another tax break for the extremely wealthy is a priority. Where is their sense of propriety?

Written by Valerie Curl

March 1, 2010 at 9:10 AM

What went wrong on Wall St.

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In the most illuminating article I’ve read on the Wall Street meltdown, Michael Lewis in this month’s Portfolio.com discusses what he learned about the products and policies that led not only to the meltdown of Wall Street as well as the destruction of the investment banking industry.

Michael Lewis, author of Liar’s Poker, writes candidly of his career on Wall Street, when as a young, no-nothing graduate, he was hired to by Salomon Brothers:

Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.

But Michael Lewis goes one step further. He interviews and discusses the mortgage products that led the country into the financial mess that now exists and how Wall Street not only did not know what it was doing but did not care. Lewis recounts a long interview he had with Steve Eisman who was one of the first people to investigate, understand and predict the mortgage problems. Eisman began his career Oppenheimer Funds as a junior equity analyst. His job changed less than a year later:

One of Oppenheimer’s investment bankers stomped around the research department looking for anyone who knew anything about the mortgage business. Recalls Eisman: “I’m a junior analyst and just trying to figure out which end is up, but I told him that as a lawyer I’d worked on a deal for the Money Store.” He was promptly appointed the lead analyst for Ames Financial. “What I didn’t tell him was that my job had been to proofread the ­documents and that I hadn’t understood a word of the fucking things.”

Nevertheless, Eisman began learning about the financial world of sub-prime mortgages.

Harboring suspicions about ­people’s morals and telling investors that companies don’t deserve their capital wasn’t, in the 1990s or at any other time, the fast track to success on Wall Street. Eisman quit Oppenheimer in 2001 to work as an analyst at a hedge fund, but what he really wanted to do was run money. FrontPoint Partners, another hedge fund, hired him in 2004 to invest in financial stocks. Eisman’s brief was to evaluate Wall Street banks, homebuilders, mortgage originators, and any company (General Electric or General Motors, for instance) with a big financial-services division—anyone who touched American finance. An insurance company backed him with $50 million, a paltry sum. “Basically, we tried to raise money and didn’t really do it,” Eisman says.

At FrontPoint Partners, Eisman partnered with two other hedge fund traders who shared the same worldview he did: Vincent Daniel, who became a partner and an analyst in charge of the mortgage sector, and Danny Moses. Together they researched and analyzed every detail of the mortgage securities industry that grew up between the late 1990s through the fall of investment banking.

In this article, Eisman explains what happened and how it happened in the mortgage industry, including how mortgage companies pushed obviously unqualified people into subprime mortgages they could not afford. And he goes into detail on the two products that caused the meltdown – Credit Default Swaps and Collateralized Debt Obligations (CDOs) – and the ratings agencies’ (i.e. Moody’s) complicity in the meltdown.

Eisman, Moses and Daniel raised the red flag numerous times, but no one seemed interested in listening to them. The banks – and traders – were making too much money.

When the meltdown finally did occur,

“All hell was breaking loose in a way I had never seen in my career,” Moses says. FrontPoint was net short the market, so this total collapse should have given Moses pleasure. He might have been forgiven if he stood up and cheered. After all, he’d been betting for two years that this sort of thing could happen, and now it was, more dramatically than he had ever imagined. Instead, he felt this terrifying shudder run through him. He had maybe 100 trades on, and he worked hard to keep a handle on them all. “I spent my morning trying to control all this energy and all this information,” he says, “and I lost control. I looked at the screens. I was staring into the abyss. The end. I felt this shooting pain in my head. I don’t get headaches. At first, I thought I was having an aneurysm.”

Moses stood up, wobbled, then turned to Daniel and said, “I gotta leave. Get out of here. Now.” Daniel thought about calling an ambulance but instead took Moses out for a walk.

Outside it was gorgeous, the blue sky reaching down through the tall buildings and warming the soul. Eisman was at a Goldman Sachs conference for hedge fund managers, raising capital. Moses and Daniel got him on the phone, and he left the conference and met them on the steps of St. Patrick’s Cathedral. “We just sat there,” Moses says. “Watching the people pass.”

This was what they had been waiting for: total collapse. “The investment-banking industry is fucked,” Eisman had told me a few weeks earlier. “These guys are only beginning to understand how fucked they are. It’s like being a Scholastic, prior to Newton. Newton comes along, and one morning you wake up: ‘Holy shit, I’m wrong!’ ” Now Lehman Brothers had vanished, Merrill had surrendered, and Goldman Sachs and Morgan Stanley were just a week away from ceasing to be investment banks. The investment banks were not just fucked; they were extinct.

Not so for hedge fund managers who had seen it coming. “As we sat there, we were weirdly calm,” Moses says. “We felt insulated from the whole market reality. It was an out-of-body experience. We just sat and watched the people pass and talked about what might happen next. How many of these people were going to lose their jobs. Who was going to rent these buildings after all the Wall Street firms collapsed.” Eisman was appalled. “Look,” he said. “I’m short. I don’t want the country to go into a depression. I just want it to fucking deleverage.” He had tried a thousand times in a thousand ways to explain how screwed up the business was, and no one wanted to hear it. “That Wall Street has gone down because of this is justice,” he says. “They fucked people. They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.”

Perhaps, on July 19, 2007, if Wall Street and the Senate had listened to Ben Bernanke, when he “warned that as much as $100 billion could be lost in the sub-prime mortgage market,” and Eisman, when he “said that he expected losses of up to $300 billion from this sliver of the market alone,” much of the resulting havoc could have been prevented. Unfortunately, no one listened. No one wanted to listen.

Even though this article is long, it is definitely well worth reading. I came away knowing a great deal more about Wall Street works and the greed that took hold of Wall Street as well as considerably more knowledge about how and why markets need to regulated to prevent future financial disasters.

In 1929, financial markets created products almost exactly like the products which caused the current financial crisis. Those products, and the concurrent leveraging, caused the crash of ’29.

We, as a whole, and our government need to understand not only what happened and take measures to prevent it from happening again. In addition, we must retain some kind of institutional and governmental knowledge to insure future generations do not have to deal with these same problems.

Greed always will exist as long as humans exist. But we can prevent the worst aspects of greed from destroying our economy. This story of Wall Street traders and Wall Street’s behavior over the last decade, presented by Lewis and Eisman, may – just may – provide the information we need to keep an event like this current one from happening again.

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