Breaking News! (And our last day of posting!)

Propublica.org, a nonprofit news organization, reported today that for the first time since 2004, Wall Street has donated more to Republican campaigns than Democratic ones. Can much more be said for the incredible backlash against proposed regulation? This comes only a few short weeks after top Republican congresspeople met with Wall Street CEOs in New York City. Mitch McConnell, the Senate minority leader from Kentucky, was the "headliner."

In other related news, Republicans in the Senate voted to block debate of the financial regulation reform bill for two consecutive days on Monday and Tuesday.

All hope might not be lost, however, for proponents of reform. GOP Senators have begun to realize that the American people really do despise Wall Street, and have agreed to end their filibuster.

Great news, just hitting the presses. Sadly, this blog will cease today. We here at Bank Reg 101 hope you've enjoyed our reporting. But in the future, we urge you to Regulate, then Make Bank.

Goldman, Toyota, and Funeral Homes

(Cartoon via robsright.com)

Just a quick elaboration on my last post, with a twist coming from the video that Kelly just put up.

Andrew Ross Sorkin went on Colbert the other night and gave a much more vivid explanation of the deceptive wheeling-and-dealing that Goldman (and as we're learning, many other banks, as well) practiced. Where my explanation of the deals captures in only the most limited way the nastiness of GS's ways, Sorkin gives a much better explanation:

They were building cars [for which] they thought, or hoped, the brakes wouldn't work, and then [were] buying funeral homes that they thought would pay off later.

Oh, how simple, and effective, and affective. Wait, am I talking about Sorkin's explanation, or Goldman's ruse?

SEC Accuses Goldman of Fraud cont..

Finally the SEC is going after Goldman Sachs and John Paulson for selling these mortgage bonds/securities. Paulson knew would fail just so they wouldn't have the liability for when they do, and Goldman Sachs agreed to sell them. The reason why they are getting a law suit against them for fraud is because they labeled these as good investments when they clearly weren't. Also Goldman Sachs didn't tell the investors that the hedge fund (Paulson) hand picked these horrible investments. The company is claiming they provided full disclosure, but come on...really? While Paulson got over $3 billion for this deal, Goldman lost money, which is another argument on their end. Even though the SEC is only filing for a civil suit, I hope Paulson gets what he deserves.

Here is an article from the LA Times on April 17 on the subject..

http://www.latimes.com/business/la-fi-goldman17-2010apr17,0,7190484.story (copy and paste because for some reason it's not letting me make it a direct link)

and here is also last night's Colbert Report on the subject..

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
Goldman Sachs Fraud Case - Andrew Ross Sorkin
www.colbertnation.com
Colbert Report Full Episodes Political Humor Fox News

When Investments Sound like Cruise Missiles: United States v. Goldman Sachs

Today, the United States Securities and Exchange Commission filed a civil suit against Goldman Sachs for fraud.

Yes, f-r-a-u-d.

The decision is a landmark one for the SEC, which up to this point has yet to file suits against firms whose financial instruments depended upon the fate of the housing market, and more specifically, the bursting of the housing bubble in 2007.

The financial instrument in question, the ABACUS 2007-AV1, sounds more like a weapon of war (think F-18 Hornet, the super-fighter plane, or the MGM-1 Matador, a nuclear-capable cruise missile) than any money-based product. Yet those analogies are eerily perfect: with these devices deployed, Goldman Sachs was in a position to benefit from the downfall of the housing market. The interests of the society at large became antithetical to their own interests. Problem is, Goldman Sachs used fraudulent practices to stack their own deck.

The process worked like this: Goldman Sachs had many loans on their books. Some were good (they would, most likely, be paid back in full and on time), and some were bad (the most likely outcome was that the debtor would not be able to pay back the loan). Goldman and its friends picked from among all those loans the very worst of them--the loans most likely to fail. They then offered these investments as bets to other hedge funds, banks, etc., except GS told these clients that the loans had been randomly chosen by an independent third party, which led the other clients to believe they had a better chance of profiting than was actually the case.

Let's put this in simpler terms. I hold a deck of cards in front of you and say, "I bet you $5 that the random card you chose will be a red card." You, thinking the chance you have of winning is 50/50, agree to the bet. Only I've done something nasty, I've filled the deck with red cards, and there's only one black card left. Inevitably, you will probably pull a red card, and I will win. This was Goldman Sach's strategy.

While these are not the kind of strategies that make the financial system, as a whole, melt down, they are indicative of a kind of mindset that clearly pervaded--and pervades to this day--the Wall Street crowd. In Krugman's taxonomy, these investments would be just the type he would insist on curbing, without trying to minimize banks' overall size. A first step?

Bipartisan support for financial reform looked likely up until now. Though two camps had emerged prior to the introduction of a bill, they had been, for the most part, based on the issue rather than the party. However, with legislation looming Democrats and Republicans have split at the seam (hard to say we didn’t see this coming). With President Obama leading the way, Senate Democrats are pushing their bill with no rewrite necessary. Expecting that a few key Republican senators, particularly those up for reelection, will support the bill, Democrats are much less inclined to change this bill than the healthcare reform passed last month. While the GOP rallies around senator McConnell, both parties agree that overheated rhetoric will only hurt policy.

Effectively the bill would give the FED the right to monitor the nation’s largest banks, those with assets over $50 billion. Then, if any institution were deemed instable the law would provide the Treasury Secretary with the authority to take over and effectively shut the company down. The overall goal, voiced by both Obama and Geithner, is to avoid any more taxpayer bailouts of financial institutions.

As legislation approaches, White house press secretary Gibbs adds that Obama “could not accept bad policy in pursuit of bipartisanship.” It is about time that the President has favored policy over politics. Though it would be great if everyone in Congress could work together, it is clear that in this particular case political clout is trying to overshadow lawmaking. Something needs to be done to prevent future collapses and if partisanship gets in the way of this bill then it could be years before another solution appears.

Krugman's Banking Regulation Study Guide

Paul Krugman, Nobel-winning economist and columnist for the New York Times, used his column a couple of weeks ago to spell out in simpler terms--terms average people like us can understand--who is for what kind of banking reform, and what each kind of reform package looks like. Keep in mind, Krugman is a dyed-in-the-wool progressive and Keynesian (he advocated a much larger stimulus package than the one delivered in Spring 2009) and his tone and content reflect that.

On one side of the debate are those who simply won't stand for banking reform. Many of these people are conservative members of Congress. They appear so opposed to reforming the financial system, it sometimes looks as if they're (figuratively) in bed with the hedge fund managers and the CEOs of big Wall Street firms (foreshadow.......). Limit the size of big banks? No. Limit banks' risky practices? No. Make bank? We'll let the revolving door theory answer that one.

For better or worse, the pro-reform side of the issue is fractured into two main camps. The first, led by Paul Volcker (see this blog's first post), views the growing stature of big financial firms as the heart of the problem. He wants to end of the "too-big-to-fail" era by limiting their size. To take such action would presumably prevent the disastrous consequences if even one of them were to fail, and limit taxpayer "liability." Krugman, who disagrees, replies:

Breaking up big banks wouldn’t really solve our problems, because it’s perfectly possible to have a financial crisis that mainly takes the form of a run on smaller institutions. In fact, that’s precisely what happened in the 1930s, when most of the banks that collapsed were relatively small — small enough that the Federal Reserve believed that it was O.K. to let them fail.

Krugman forms the other side of the pro-reform crowd. His plan is "to update and expand old-fashioned bank regulation."

What ended the era of U.S. stability was the rise of “shadow banking”: institutions that carried out banking functions but operated without a safety net and with minimal regulation. In particular, many businesses began parking their cash, not in bank deposits, but in “repo” — overnight loans to the likes of Lehman Brothers.

These "shadow banks are the keys to Krugman's reform ideas. Regulators should be able to seize failing shadow banks, he says, and put strict limits on their activities and their influence in the banking system.

Krugman followed up with a couple of brief notes on his NY Times blog. To the dissenters who say that deposit insurance will keep us truly safe, he responds that the deposits are not the source of our problems. Our banking system has "grown up" and now plays with more sophisticated and dangerous toys like "repo and other forms of short-term borrowing." These are the devices that took down Lehman Brothers. And for Krugman, they could do it again.

Meet Elizabeth Warren

One of the lesser-known, but equally important, figures in the debate over banking regulation has been Elizabeth Warren, a professor of law at Harvard and the Chair of the Congressional Oversight Panel, which was created to supervise the TARP bank bailout money.

Since the crisis began in 2007-8, Warren has advocated for an independent consumer protection agency designed specifically to monitor financial devices. In her words, banks have gouged consumers using "deceptive and dangerous terms buried in the fine print of opaque, incomprehensible, and largely unregulated contracts" (see that blog post here).

One of her interesting observations about this entire fiasco regards the mentality of ordinary citizens and the anger they feel over financial malpractice. It's not "populist rage" they feel; they see with "crystalline clarity" that "their economic security is under assault" (same source).

For the same reason that doctors are required to pass the board exam, and attorneys the Bar, it seems more than reasonable to expect financial operatives to submit to some authority as well. Think about it: financial companies operate under similar (though not identical) conditions as doctors and lawyers. They are paid to perform a service that, while in the short-term may incur costs, will presumably pay off. I suppose an opponent of banking reform might reply that anyone who becomes involved in financial operations should know that nothing is certain, and there is risk involved.

To me, that brings up a couple more questions:

• First, should we consider financial operators to be performing a service (like that of doctors or lawyers), or should we call them what they really are (or what they've shown themselves to be over the last two years), which are glorified gamblers who have loaded the die?
• Second, can we consider the clause, "by becoming involved in financial operations, you submit yourself to vast potential risk," to be an adequate cop-out from public oversight?