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?

Fluctuations in Banking Regulations

Throughout the economic history of the United States, government regulation has declined during times of prosperity and increased in times of national crisis. During periods of economic prosperity, banking regulation receives little to no attention as the focus is placed instead upon securing individual prosperity. In an article concerning trends in banking regulation, David Leonhart discusses the repercussions of fluctuating bank regulations. He writes the following:

By definition, the next period of financial excess will appear to have recent history on its side. Asset prices will have been rising, and whatever new financial instrument that comes along will look as if it is safe. "When things are going well," Paul A. Volcker, the former Fed chairman, says, "it's very hard to conduct a disciplined regulation, because everyone's against you." Sure enough, both Bernanke and Geithner, along with dozens of other regulators, overlooked many signs of excess over the past decade.

The article strives to convey the importance of keeping banking regulation a priority in both times of prosperity and crisis. It is necessary that a perpetual state of regulation be enacted to protect individuals from fiscal losses incurred by corporate misjudgment. Additionally, the U.S. government will be saved the costs of repairing financial meltdowns if a standard yet flexible bank regulation be put in place.

The argument for increased banking regulation is supported by the comments of Arnold King regarding Leonhart’s article. King writes about the essentiality of time consistency in banking regulations. Simply because times are good, King points out, does not justify lax regulations. Rather, the solution lies in “making credible commitments not to bail out failed banks” and “that you need to make credible commitments to keep rules in place when times are good”. In employing these precautions and standards, a commitment to today’s regulatory regime will remain intact.

For further reference and to view the article, please visit the Library of Economics and Liberty website at:

(http://econlog.econlib.org/archives/2010/03/time_consistenc_1.html)

A field trip to the (outside of the) New York Fed

I had the distinct pleasure of spending my Spring Break in the world's greatest city, New York. (Skeptics, lay down your spears, they've got it by a long shot). Among the requisite hours of wandering the lonely grey streets by myself, and out of a clear duty to the undertakings of this blog, I paid a visit to one of our government's most notoriously lavish (or is it lavishly notorious?) buildings, the Federal Reserve Bank of New York.

Of course, though, I didn't go inside. More specifically, I wasn't allowed inside. If I'd wanted to, I would have had to make plans six weeks in advance, via direct communication with Ben Bernanke, his permission written in stone with blood (OK, the blood part is exaggerated). Nonetheless, even if I'd had a tablet with Ben's hancock on it, the guard's general air of nonplussedness makes me wonder if I'd have been allowed in.

So instead of taking a look inside, I made a circle of the block on which the building stands. The above picture gives you an idea, more or less, of the appearance of the building. Why, it looks like the Egyptian pyramids made out of granite! you say. Yes indeed, it does. I'd bet these blocks were rolled vast leagues upon giant logs, with the aggregated will of many thousands of peasant hedge fund managers. Every fifty feet or so, between those giant stones, each first floor window has been covered over with a slab of concrete, which is in turn caged by wrought iron bars. Apparently they want to keep what's outside, out, and what's inside, in. At least that's what I took from the experience.

I had read in David Wessel's book In Fed We Trust that several hundred feet below the Fed building, upon the bedrock of Manhattan Island, is The Vault, where many tens of gazillions of dollars in gold bullion are stored. Not one to miss my chance to cash in, I found a plot of dirt (hard to come by here) and started digging.

A word to the wise: several hundred feet is a long way down. After three to four slog-filled minutes, replete with bloodied knuckles and awkward stares from passers-by, I lay down my tools (an empty Dunkin Donuts cup and a toothbrush I bought at Duane Reade) and was beaten.

As I vacated the premises (the guard's words, not mine), I noticed I was not alone in my desire to stand up to The Man (and also not alone in ultimately losing out). On the opposite side of the building from my mining experiment was another apparent member of the Rebel forces, under the glare of a non-so-official-looking deputy, cleaning from a low corner of the Fed what looked like graffiti.

Judging by her violet-colored fleece of the North Face variety, and her comfortable-looking Keen shoes, I estimated she was from the Pacific Northwest, having made a sort of anti-pilgrimage to the East to protest evil financial practices that are probably irrelevant in the Northwest, anyway (I have heard most people up there live deep in the woods, eating only granola and what they can forage from streams and with hatchets [my sources for this information are Bill Bryson and Gary Paulson books]). I offered some silent solidarity to her struggles and went on.

What did I learn from this trip? To be honest, not much. Mostly that you should wear gloves when you dig in Manhattan. Then again, the Federal Reserve does seem kind of important in the whole scheme of things, holding a lot of our money and stuff, and trying to keep our economy afloat, you know? At first I thought those big thick walls were a little bit showy and standoffish, but considering what goes on inside, I could maybe kind of see why they pay a tough guy to stand at the door telling people like me to go away. Whatever. I don't know. What do you think?

Chris Dodd continue...

Adding on to the previous post about Senator Dodd, the Daily Show on March 16 talks about Dodd's proposal. This talks about how Dodd had been working together with Republican senator, Bob Corker, but then suddenly decided to quit the talks with Corker and will discuss his own bill this coming Monday about the financial regulations. It talks about the same regulations (in less detail) discussed in the blog post previous to this, but this clip is worth watching.

http://www.thedailyshow.com/watch/wed-march-17-2010/in-dodd-we-trust

Senator Dodd's Regulation Proposal

Last week Connecticut Senator Christopher J. Dodd (Dem.) proposed a new plan for rectifying financial regulation. The proposal calls for the creation of a Bureau of Financial Protection which would modify the Consumer Financial Protection Agency supported by the House last December. If accepted the bureau will be responsible for regulating and preventing mortgage, credit union and payday loan deception amongst other financial issues which violate consumer safety. Senator Dodd recommends the following be implemented:

• the creation of the bureau within the national Treasury Department


• an independent director whom the president appoints


• a budget derived from fees obtained from large banks and other lenders


• obligatory discourse between existing bank and credit union regulators to ensure new rules are agreeable to all parties involved

The proposal is contested by big bank lobbyists and consumer advocates regardless of political alliance. Those in favor of big banks argue that the proposal will allow for an unnecessary increase in government control of financial industries and will impose upon existing regulators whom already ensure consumer safety. On the other hand, consumer advocates oppose the plan because it will only allow for regulation of banks and credit unions which maintain gross assets rather than all financial institutions. Additionally, requiring discussion with existing regulators, those deemed responsible by some for the financial crisis, limits the independence of the bureau to create new rules beneficial to the public.

Proposals introducing new policies which affect financial regulation will continue to elicit controversy. Government officials must consider the interests of lobbyists but ought not place them above the needs and protection of the consumers. It is time for the government to settle upon a financial regulation reform plan which benefits the American public not private interests.

For further information please see the attached New York Times article:

http://www.nytimes.com/2010/03/01/business/economy/01regulate.html?pagewanted=1

Regulation Difficulties

A couple of the major ideas for reform in the banking system are: 1. There's talk about reducing the maximum size of banks, or capping the market shares within banks. and 2. there will be some form of increased separation between commercial banking and investment banking. But obviously this won't be easy to accomplish. Many of the current financial techniques in the United States, which were main contributors to the crisis (earlier posts have touched on some of those subjects/techniques), make it so big firms and corporations are able to avoid these regulations. Also, our financial system is obviously involved in global economic networks, so it is difficult to impose reform that would also prevent future crises on an international level as well.
http://www.forbes.com/2010/01/27/obama-volcker-economy-business-banks-oxford.html

One example dealing with the international tension among the bankers, is discussed in an article from the Wall Street Journal, "Banker Bashing Masks Rise of China." http://online.wsj.com/article/SB10001424052748704107204575039013978842230.html?KEYWORDS=banking+reform Here several countries met at the World Economic Forum in Davos, Switzerland, discussing mainly China's role in the global economy today. First of all, the United States dollar is the international dollar. This means that countries involved with international investments in the World Bank needs to trade or invest in the United States in order to receive our currency, which has been the way of the global economy ever since the world ended the era where countries used blocks of gold as their money investing. But now, due to our banking downfall, countries are unhappy with us still having that authority, thus having great tensions at the convention. But as of now, we the US would be affected by this negatively by keeping it this way as well. This article discusses a reporting from James Harding, editor of The Times, which explained more how this would affect our economy.

Among the most striking things he heard at Davos was the belief expressed by a senior Chinese official that the dollar carry-trade was the single biggest threat facing the global economy. The official was concerned that if the U.S. economy weakened, the unraveling of the trade—in which investors borrow at low interest rates in dollars and invest in higher yielding assets elsewhere in the world—would bring huge disruption to the capital markets. He estimated that as much as $1.5 trillion was already invested in such strategies.

So it makes sense that reforming our regulations is difficult on many levels, since we have to deal with other countries as well as our own. "The hostility against bankers [at the forum] was hardly surprising," said Gerard Baker, deputy editor-in-chief at The Wall Street Journal. What was surprising was "the ferocity and provenance of that hostility."

But since the bankers know reforms are vital right now, and are deeply concerned with what reforms are going to be implemented and how they are going to be implemented, they are unaware of their fellow US citizens' opinions and thoughts. An editor-in-chief for the Wall Street Journal, Patience Wheatcroft, quoted Christine Lagarde, the French finance minister, of the public's anger. "'Bankers still don't seem to get just how angry people are.' The backlash from companies that are resentful about the level of fees they have been asked to pay banks has also now come to the fore."

It's Those Fat Cats at the Top!

According to reports from Democracy Now the financial crisis is far from over with many banks around the nation at risk of shutting their doors. In the headline, Federal Deposit Insurance Corporation Chair, Sheila Bair, has said that banks have decreased lending by $587 billion in 2009. She went on to specifically point a finger at major banks saying they need "to do a better job of stepping up to the plate." She also noted that over 700 banks were cited as in danger of failing at the end of 2009.
In a related article published just four days before the aforementioned headline, Damian Paletta of the Wall Street Journal also commented on the situation citing the fact that four banks were shut down from Florida to California just this past Friday! This is an ongoing crisis folks! The following excerpt from Mr. Paletta's article details the largest of these closures, nearby in San Diego California:

"The largest bank to fail Friday was the 10-branch La Jolla Bank in California. Its $3.6 billion of assets made it the biggest bank to fail in 2010. The FDIC sold all of La Jolla's deposits and virtually all of its assets to OneWest FSB, a thrift created last year after investors bought up pieces of the failed IndyMac Bank. The FDIC and OneWest agreed to share future losses on $3.3 billion of the La Jolla Bank's deposits."

What is evident here is the burden on taxpayers through the FDIC. What is perhaps between the lines and not so apparent is the harsh economic realities of what happens when recession hits: Negative speculation grips the market with fear, lending rates go down which stagnates investment and new business and job creation. Home-ownership loans and other forms of personal reasons to borrow money are decreased as fewer people are eligible due to their credit scores, past debts, bankruptcies, unemployment, etc...

Why I think these stats are important lay in other facts. Also on Democracy Now this morning (see link above) and many other times on the show, the fact that while Wall Street bonuses are at an all time high growth rate, and companies like Goldman Sachs are making record profits, Main Street is suffering. The closure of smaller banks indicates the failure of the Obama/Geithner/Bernanke bailout plan to have some sort of "trickle down effect" from the 'bloated' big banks who received the bulk of compensation. I am personally disgusted. Tips on my next post (check the tags at the bottom to see author) on how to support good banks and local credit unions as opposed to those large malpractictioners like B of A, Wells, Chase, Citi.....you get the picture.

picture from: https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtZQaTTgs7blwPn6gNpclKSQEypRM5LIbgmkvrW6kJR5rk4d_r8WJDYiGOenb8KPt3N4SKy9c2aaQImIQpYw4H61RqwAPsjnxI_9HyLkI5z4eyOAmreK1ytj4uFnDepccg3eYRzv_710Y/s1600-h/KLARC's+Fat+Cat+cartoon1.JPG

Overseeing Banks: Who Does It?

With the economy slowly limping back towards the positive, government action is starting to take place. Pushed along by President Obama, Congress finally has banking regulation bills on the floor. Though the House has already passed a primary bill, debate in the Senate continues over who should be in charge of overseeing the banking industry. Their are currently two choices, the Fed (Federal Reserve Bank), and the Treasury Department. Neither party has solidified which side it supports with both Democrats and Republicans supporting each "candidate."

The House bill provides for continued Fed power, however it is likely the the Senate decision will strip the Fed of some of its responsibilities, bequeathing them to the Treasury Department. The most important is financial regulation. Mr. Bernanke (head of the Reserve) said earlier this month that he would support a Treasury-lead council, however only in regards to risk management.

Whether or not the Fed should lose control of some regulation is still up for debate. What is clear, is that Congress will soon pass a bill creating a committee to watch over financial institutions in an effort to prevent another economic collapse. Hopefully this committee will mark a meeting of the Fed and the Treasury, and that a coalition of these agencies will promote a more watchful guardian over the big national banks.

Colbert Report--Eliot Spitzer

Here Eliot Spitzer, a former Democratic politician and New York Governor, is interviewing with Stephen Colbert about the current financial system. Spitzer is criticizing the fact that the United States is rebuilding the entire system exactly the same way as it was before the burst. He believes that everyone should be angry that hundreds of thousands of dollars of our tax money are being put to rebuilding the system, rather than investing this tax money in the economy, which needs it more. He declares that we should constrain the banks, for if they receive bailout money and guaranteed federal credit, then they need to lend the money as opposed to the trading and casino economy.

You can watch that clip here on Colbertnation.com .

Summers on CNBC: Oh how memory fades...

President Obama's top economic advisor, Larry Summers, appeared on CNBC last weekend with a message for the big banks: You're bloated. (Yes, he used the word "bloated").

That is, among other criticisms. He has also recently advocated a ban on proprietary trading (trading done with the bank's own money, not the deposits it takes from customers) and limits on the acceptable size of banks. Not to say these policies are unwise--in fact, you might call them perfectly reasonable--one should note they represent a major flip-flop for Summers.

That's because as Treasury Secretary under the Clinton administration, Summers stood behind the Gramm-Leach-Bliley Act, which neutered the Glass-Steagal act of the Depression era and opened the floodgates for some of the greedy and risky mergers that put the banks (and the American people) in trouble over the last several years.

Nonetheless, we can hope that this change of heart is genuine and repentant (though probably not repentant), and that it does real, positive good for the stability of the financial system.

Colbert Report--Eliot Spitzer

Here Eliot Spitzer, a former Democratic politician and New York Governor, is interviewing with Stephen Colbert about the current financial system. Spitzer is criticizing the fact that the United States is rebuilding the entire system exactly the same way as it was before the burst. He believes that everyone should be angry that hundreds of thousands of dollars of our tax money are being put to rebuilding the system, rather than investing this tax money in the economy, which needs it more. He declares that we should constrain the banks, for if they receive bailout money and guaranteed federal credit, then they need to lend the money as opposed to the trading and casino economy.

http://www.colbertnation.com/the-colbert-report-videos/263255/february-02-2010/eliot-spitzer (just in case the video doesn't play..I've tried like multiple times to upload it but it's been acting up every time)

Manipulation in Merrill Lynch Bailout

This past week New York state officials filed a lawsuit against Bank of America executives regarding the Merrill Lynch bailout. The bailout occurred in January 2009. Bank of America was allotted $45 billion in government funds after merging with Merrill Lynch. Merrill Lynch used money from the original bank bailout funds to pay executive bonuses knowing that the institution had sustained fiscal losses during that year. Despite this, Bank of America merged with Merrill Lynch and used their extra government funding to cover the losses incurrred due to payment of the bonuses.

In order to prevent further misuse of government funding the federal government needs to better allocate and oversee the distribution of bailout money. This would entail conducting more in depth inquiries regarding payments of bonuses to bank executives, monitoring how the bailout money is spent by banks, and restricting the use of funds. Fiscal transactions should be made more transparent as well. The public is now aware of the current scandal due largely to the media coverage of the filed lawsuit. Citizens, however, deserve protection against such manipulation of monetary funding which can be achieved through pre-emptive government regulation.

Please see the attached BBC article for further information regarding the Bank of America and Merrill Lynch lawsuit:

http://news.bbc.co.uk/2/hi/business/8499281.stm

Lackadaisical Banking Regulations Sink U.S. Economy.....in 1929....and again in 2009!

Obama inherited a banking crisis that had spiraled way out of control. On the eve of the largest impending collapse of our banking system, Obama was sworn into office and almost immediately began to piece together a solution to a farreaching financial problem that had its roots in the banking industry. Leading him to the controversial insistence, along with Geithner and Bernanke, that a gigantic bailout for the nation's banks was in order. This has happened before in American history (well, not the huge monetary bailouts). In 1933, Roosevelt’s highest priority, during what turned out to be an extremely busy first 100 days of his presidency, was the farreaching financial crisis that had its roots also in the banking sector of the United States. Roosevelt was inaugurated directly in the midst of impending crisis when all over the nation, even in Roosevelt’s home state of New York, banks were experiencing an extended holiday while a major financial hiccup was being analyzed and dealt with. Stemming from a network of unit banks acting as affiliates, a microcosmic example of a large-scale problem triggered a nationwide panic. Henry Ford’s personal network of banks (figuratively speaking) were found to be doctoring and concocting different fraudulent mechanisms to boost the reputation and deposit reserves of some 32 financial institutions, all associated with Guardian Detroit Union Group, Inc (the financial arm of the Ford dynasty). The reasons for these misrepresentations lay in the ill-advised loans, bonuses, and benefits that 52 of 61 financial directors and 33 of 43 banking officers all received. The inherent problem here is the mismanagement of business practices for the benefit of powerful individuals and entities like Henry Ford, Ford Motor Corporation, and the allies within the financial sector that supported him. This one example of a greater problem was the proverbial straw that broke the camel’s back. Once broken, the question became: How to regulate and progress the banking industry from its depths?

The answer came in the form of FDR cajoling together financial and economic heavyweights from congress, in this case Senators Glass and Steagall along with other financial advisors. The result of this brainstorming was the Glass-Steagall Act. The touchstone issues in the subsequent Glass-Steagall Bill of 1933 were two-fold. The first provision was the inclusion of the Federal Deposit Insurance Corporation (FDIC); which was basically a glorified savings account taken from public tax dollars and small increments from Federal Reserve member banks that would insure depositors most, if not all of their monetary funds in the commercial banking sector. The second provision effectively separated commercial banking, which is the traditional model where citizens hold their money in banks with interest accumulating in exchange for the bank's ability to use those funds to generate loans, from investment banking, which is the usage of bank reserves to put forth in other investments and loans that are much riskier and often repackaged and retooled as bonds, mutual funds, stocks, mortgages, etc...The inclusion of the creation of the FDIC was controversial but necessary for its context. It ensured to the masses that their deposits would never disappear; it stopped the phenomenon known as "bank runs". It was controversial because it was the first version of a law that protected bad business practices in the banking industry. If a bank failed, it was not responsible for refunding its customers; the FDIC fund would ensure a return on the deposits. While this alone is troubling, the provision of stopping private corporations from doing both commercial and investment banking was supposed to give banks less incentive to make bad decisions with the reserves they have accumulated through deposits. This part of the Glass-Steagall Act was mutually agreed upon by many experts as well as Roosevelt himself.

I have spent so much time discussing what is known as the first great economic downturn in the modern era that now I feel the need to make this information somehow linked to our current predicament in regards to the all-important American banking industry. In 1999 the section of the Glass-Steagall Act that seperated the two forms of banking was repealed. Interesting...........it now starts to make sense how this so called "unexpected" financial collapse commenced itself via the repeal of Great Depession Era legislation. The passage of the Gramm-Leech-Bliley Act, as it is known, is detailed here.

If you can put two and two together, which is sometimes tough when discussing such a boring subject as banking regulation, this bill allowed companies like Citigroup, Goldman Sachs, Freddie Mae and Fannie Mac to be able to dabble in multiple markets simultaneously such as the commercial banking sector, the mortgage industry, the stock and bond markets; which basically, when pooled together can be called the speculative wealth marketplace. In this sphere, companies such as, I don't know, say, Goldman Sachs, can buy and sell the rights to the mortgages of millions of Americans, just as an example (which did happen: Goldman Sachs overvalued a large amount of mortgage securities on purpose so they could sell them to other investment firms just before the mortgage industry bottomed out). The scenario I described earlier in regards to Ford Motor Company and its financial subsidiaries' money mongering is child's play compared to the vast complexities of financial instruments that have been invented by companies like Goldman Sachs in the last decade. To hear more about the repeal of parts of Glass-Steagall, John Stewart has a great interview with Elizabeth Warren about its effect on the world financial crisis we are currently weathering. Like Ford's executives in the 1920's, many specters of the current financial crisis just love to award themselves fat bonuses for a job poorly done. Thanks FDIC! Thanks Government Bailout!

Interestingly enough, good ole' boy moderate, John McCain, in 2009 called for the return of banking regulations such as those included in the aforementioned Great Depression legislation. There is a great article in Newsweek describing McCain and others' (including former Fed Chairmen Volker) call to restructure our banking system.

That is all for now, come back for more! We will be detailing in the coming editions, the players complicit in the financial crisis, those who are trying to do something about the power of big banks, and of course what measures are being talked about or perhaps are already on the floor being debated.

Men in Fancy Suits: Let's Play Icebreakers

The first step we'll take to understanding potential banking regulation this semester will be to get to know the people involved--the major players who we'll see on TV or hear on the radio, whose names are mentioned along with various plans, organizations, or other important individuals. We'll begin with four people whose names have been in the air since the Obama administration came to office in January of 2009. Even though some hail from academia and others from top banks, in reality, they are all just men in fancy suits.

We'll go alphabetically...

1. Ben Bernanke: Chairman of the Federal Reserve

The unassuming man from South Carolina spent much of his career teaching at Princeton University after receiving degrees from Harvard and M.I.T., where he had particular interest in the Great Depression. It was only in 2005 that he became involved in politics, when George W. Bush tapped him to become part of his Council of Economic Advisors. He spent a year there before being nominated and confirmed as the successor to Alan Greenspan as Chairman of the Federal Reserve. If he only knew what he was getting into...

In 2007, when credit was beginning to tighten, Bernanke oversaw several large interest rate cuts. But only in 2008 did the credit crisis boil over, leading to the now infamous acquisition of Bear Stearns, a private investment bank, by JPMorgan Chase; the collapse of Lehmann Brothers; and the beginning of the bailouts. Bernanke is said to have helped coordinate the takeover of Bear Stearns, and has already taken much heat for advocating the bailout of the American International Group. During his tenure as Chairman of the Fed, he has overseen massive increases in the entity's power, utilizing billions of dollars of its funds to shore up unstable financial institutions. (See a very good bio of Bernanke HERE on nytimes.com)

2. Timothy Geithner: Secretary of the Treasury

When Tim Geithner's name was leaked as the nominee for the position of Secretary of the Treasury, stocks rose 300 points. That, in itself, should be an indication of his history with the financial industry. He is not a bank insider, per se, but his long career has included several decades of close work with the financial institutions that have borne much of the blame for the current recession. He first joined the Treasury department in 1988 as a low-level employee, and gradually worked his way upwards. During the Clinton administration, he was named under secretary of international affairs. On his way to becoming president of New York Federal Reserve in 2003, he spent some time as the director of the International Monetary Fund. Before being nominated to his current position, he worked closely with Hank Paulson, his predecessor, and Ben Bernanke, in order to stabilize a rapidly deteriorating economy. Much experience indeed...

As Secretary of the Treasury, Geithner has resisted some of the administration's vocal left-wing members. He has remained true to (or erred on, depending on how you see it) the side of handing banks large amounts of capital to open credit markets and cleanse balance sheets of toxic financial instruments. For that stance, he has faced considerable criticism from both sides of the aisle. But when A.I.G. announced it would be awarding generous bonuses in March 2009, Geithner really took heat. How did he not know about them? lawmakers asked, and why can't he stop them? Since, Geithner has been part of the Obama plan to limit the intricate financial activities of banks. Nonetheless, in recent weeks, several lawmakers have called for his resignation. (Read more on Geithner HERE).

3. Larry Summers: Director, National Economic Council

The former president of Harvard University, chief economist at the World Bank, and Treasury Secretary under President Clinton is known for his dogmatic emphasis on debate and discussion. He is President Obama's closest economic advisor, and controls what appears in each day's economic briefings.

In spite of his personal connection to high finance (he is said to have earned over $5 million while consulting--one day per week for two years--for one of the world's largest hedge funds, D. E. Shaw & Co.) he has recently shown himself allied more with President Obama's progressive political advisors than with his moderate cabinet members. Whether that means he will throw himself behind proposed regulations to reign some of Wall Street's most lucrative financial institutions, we don't currently know. However, his reputation does suggest he is "more sympathetic to the concerns of investment bankers (see the nytimes.com article on Volcker).

(More on Summers HERE).

4. Paul Volcker: Chair, President's Economic Recovery Advisory Board

Paul Volcker's reputation precedes him by miles. His career spans the the entire second half of the twentieth century, and includes tenures with the New York Fed, Chase Manhattan bank, the Treasury Department, Princeton University, the Federal Reserve, and his current position with the Obama administration. As chairman of the Federal Reserve in the 70s and 80s, he was at first criticized for pushing aggressive interest rate increases, which attempted to fend off the inflation caused by negative oil supply shocks in 1973 and 1978. In retrospect, however, he has been lauded for those tactics, and for laying the groundwork for subsequent economic growth.

Volcker is viewed by many as an opposing voice to those of Tim Geithner and Larry Summers. "The Volcker rule," or a ban on big bank's proprietary trading, stands as part of a greater progressive plan to stabilize and regulate the financial industry. Moreover, it has been said that Volcker and Summers do not get along. But while while Summer's has the advantage of leading a specific chain of command (and having the sole economic office in the West Wing), Volcker's role affords him greater freedom to voice his opinions. Whether Volcker's more aggressive plan prevails over or submits to the more conservative options is yet to be seen. (Read more on Volcker HERE).

(Credit for the material in this post is due to the New York Times online, Bloomberg News, and the New York Fed website).