How Goldman SACS secretly bet on the U.S. housing crash

Perhaps this is the beginning of the prosecutions coming.

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."The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."

More via How Goldman secretly bet on the U.S. housing crash | McClatchy.

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Why Haven't Any Wall Street Tycoons Been Sent to the Slammer?

All I will say is find them and then hang them high.

Cover of Citizen Kane (Two-Disc Special Edition)

More than a year into the gravest financial crisis since the Great Depression, millions of Americans have seen their home values and retirement savings plunge and their jobs evaporate.

What they haven't seen are any Wall Street tycoons forced to swap their multi-million dollar jobs and custom-made suits for dishwashing and prison stripes.

There are plenty of civil and class-action lawsuits from aggrieved investors angered by the losses in their mortgage bonds, hedge funds or pensions. Regulators have stepped up their vigilance after the fact. But to date, no captain of finance tied to the crisis has walked the plank.

There have been some high-profile arrests and federal convictions of financial giants — such as Ponzi scheme king Bernard Madoff and Stanford Financial Group chairman Robert Allen Stanford. They weren't among the causes of the financial meltdown, however, just poster boys for an era of lax enforcement, weak regulation and devout faith in free markets.

"A lot of people who are responsible (for the crisis) seem to have gotten awfully rich in the process," said Barbara Roper, the director of investor protection for the Consumer Federation of America.

The absence of what many would call justice stands out all the more because past financial crises always had their villains. The depression-era had electricity and railroad magnate Samuel Insull, who partly inspired the movie "Citizen Kane." The savings and loan crisis of the 1980's had banker Charles Keating. Energy giant Enron Corp.'s spectacular collapse offered the late CEO Kenneth Lay, a Texas crony of President George W. Bush.

Yet there's no such poster child for the Great Recession, as today's crisis is now called.

One may yet emerge. The FBI has more than 580 large-scale corporate fraud investigations under way. At least 40 of them are scrutinizing players in sub-prime mortgage lending, which was the first domino to fall and triggered a global financial crisis.

"The investigations are very complex; it's not something that's going to turn overnight," said Bill Carter, a spokesman at FBI headquarters. "They are labor intensive. They involve a review of records."

via t r u t h o u t | Why Haven't Any Wall Street Tycoons Been Sent to the Slammer?.

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A year after financial crisis, the consumer economy is dead

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Remember the old sage advice, "Live beyond your means and you'll pay for it later"? It's come back to roost. Everyone, the banks, credit card companies, the government and you and I have been living off borrowed time and money. The money has run out, there is no credit to be easily had, probably not again in another generation.

One year after the near collapse of the global financial system, this much is clear: The financial world as we knew it is over, and something new is rising from its ashes.

Historians will look to September 2008 as a watershed for the U.S. economy.

On Sept. 7, the government seized mortgage titans Fannie Mae and Freddie Mac. Eight days later, investment bank Lehman Brothers filed for bankruptcy, sparking a global financial panic that threatened to topple blue-chip financial institutions around the world. In the several months that followed, governments from Washington to Beijing responded with unprecedented intervention into financial markets and across their economies, seeking to stop the wreckage and stem the damage.

One year later, the easy-money system that financed the boom era from the 1980s until a year ago is smashed. Once-ravenous U.S. consumers are saving money and paying down debt. Banks are building reserves and hoarding cash. And governments are fashioning a new global financial order.

Congress and the Obama administration have lost faith in self-regulated markets. Together, they're writing the most sweeping new regulations over finance since the Great Depression. And in this ever-more-connected global economy, Washington is working with its partners through the G-20 group of nations to develop worldwide rules to govern finance.

"Our objective is to design an economic framework where we're going to have a more balanced pattern of growth globally, less reliant on a buildup of unsustainable borrowing . . . and not just here, but around the world," said Treasury Secretary Timothy Geithner.

The first faint signs that the U.S. economy may be clawing its way back from the worst recession since the Great Depression are only now starting to appear, a year after the panic began. Similar indications are sprouting in Europe, China and Japan.

Still, economists concur that a quarter-century of economic growth fueled by cheap credit is over. Many analysts also think that an extended period of slow job growth and suppressed wage growth will keep consumers — and the businesses that sell to them — in the dumps for years.

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Pope wants ethical financial order

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The Press Association

Pope Benedict XVI has called for a new world financial order guided by ethics and the search for the common good.
He condemned the profit-at-all-cost mentality and blamed it for bringing about the global financial meltdown.
In the third encyclical of his pontificate, Benedict also pressed for reform of the UN and international economic and financial institutions to give poorer countries more of a say in international policy.
"There is urgent need (for) a true world political authority" that can manage the global economy, guarantee the environment is protected, ensure world peace and bring about food security for the poor, he wrote.
The document, Charity in Truth, was in the works for two years, and its publication was repeatedly delayed to incorporate the fallout from the crisis.
It was released on Tuesday - the day before leaders of the G8 industrialised nations meet to co-ordinate efforts to deal with the global meltdown, signalling a clear Vatican bid to prod leaders for a financially responsible future and what it considers a more socially just society.
"The economy needs ethics in order to function correctly - not any ethics, but an ethics which is people centred," Benedict wrote.
German-born Benedict, 82, has spoken out frequently about the impact of the crisis on the poor, particularly in Africa, which he visited earlier this year.
But the 144-page encyclical, one of the most authoritative documents a pope can issue, marked a new level of church teaching by linking the Vatican's long-standing social doctrine on caring for the poor with current events.
While acknowledging that the globalised economy had "lifted billions of people out of misery", Benedict blamed the unbridled growth of recent years for causing unprecedented problems as well, citing mass migration flows, environmental degradation and a complete loss of trust in the world market.
Copyright © 2009 The Press Association. All rights reserved.

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Image via Wikipedia

The Press Association

Pope Benedict XVI has called for a new world financial order guided by ethics and the search for the common good.
He condemned the profit-at-all-cost mentality and blamed it for bringing about the global financial meltdown.
In the third encyclical of his pontificate, Benedict also pressed for reform of the UN and international economic and financial institutions to give poorer countries more of a say in international policy.
"There is urgent need (for) a true world political authority" that can manage the global economy, guarantee the environment is protected, ensure world peace and bring about food security for the poor, he wrote.
The document, Charity in Truth, was in the works for two years, and its publication was repeatedly delayed to incorporate the fallout from the crisis.
It was released on Tuesday - the day before leaders of the G8 industrialised nations meet to co-ordinate efforts to deal with the global meltdown, signalling a clear Vatican bid to prod leaders for a financially responsible future and what it considers a more socially just society.
"The economy needs ethics in order to function correctly - not any ethics, but an ethics which is people centred," Benedict wrote.
German-born Benedict, 82, has spoken out frequently about the impact of the crisis on the poor, particularly in Africa, which he visited earlier this year.
But the 144-page encyclical, one of the most authoritative documents a pope can issue, marked a new level of church teaching by linking the Vatican's long-standing social doctrine on caring for the poor with current events.
While acknowledging that the globalised economy had "lifted billions of people out of misery", Benedict blamed the unbridled growth of recent years for causing unprecedented problems as well, citing mass migration flows, environmental degradation and a complete loss of trust in the world market.
Copyright © 2009 The Press Association. All rights reserved.

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The Fallacy of Laissez-faire Capitalism

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I think the whole concept of Laissez-faire Capitalism is based on at least one false premise. Alan Greenspan in October 2008 pretty much described the problem to the House Oversight Committee:

Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity are in a state of shocked disbelief.

People will indeed act in self-interest. The assumption was the a well run company
would function in it's self-interest. However, the system was hijacked by a worship of CEOs. Filling their pockets with unimaginable funds gave them an illusion of being all knowing, and ultimately believing that their own self-interest was best. They surrounded themselves with Board members they controlled. The "dictatorship" of the shareholders suffered a coup at the hands of the CEOs.

This fallacy of mutual self-interest extends to the original corporate design. The interest of the collective share-holders was not the same as the the interests of the company, and certainly not the community.

The values of capitalism need a rework. Self-interest can not be the driver of the market. The value of stewardship of the community's interest needs to be incorporated at a fundamental, ie regulation, level. 

As we see in the mortgage scandal, the consumer can't possibly understand the market well enough to protect his own interests. Only the government can be in "loco parentis".

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Stressing the Positive for Banks; The Rest of Us Should Be Very Afraid

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NYTimes.com
By PAUL KRUGMAN

Hooray! The banking crisis is over! Let's party! O.K., maybe not.
In the end, the actual release of the much-hyped bank stress tests on Thursday came as an anticlimax. Everyone knew more or less what the results would say: some big players need to raise more capital, but over all, the kids, I mean the banks, are all right. Even before the results were announced, Tim Geithner, the Treasury secretary, told us they would be "reassuring."
But whether you actually should feel reassured depends on who you are: a banker, or someone trying to make a living in another profession.
I won't weigh in on the debate over the quality of the stress tests themselves, except to repeat what many observers have noted: the regulators didn't have the resources to make a really careful assessment of the banks' assets, and in any case they allowed the banks to bargain over what the results would say. A rigorous audit it wasn't.
But focusing on the process can distract from the larger picture. What we're really seeing here is a decision on the part of President Obama and his officials to muddle through the financial crisis, hoping that the banks can earn their way back to health.
It's a strategy that might work. After all, right now the banks are lending at high interest rates, while paying virtually no interest on their (government-insured) deposits. Given enough time, the banks could be flush again.
But it's important to see the strategy for what it is and to understand the risks.
Remember, it was the markets, not the government, that in effect declared the banks undercapitalized. And while market indicators of distrust in banks, like the interest rates on bank bonds and the prices of bank credit-default swaps, have fallen somewhat in recent weeks, they're still at levels that would have been considered inconceivable before the crisis.
As a result, the odds are that the financial system won't function normally until the crucial players get much stronger financially than they are now. Yet the Obama administration has decided not to do anything dramatic to recapitalize the banks.
Can the economy recover even with weak banks? Maybe. Banks won't be expanding credit any time soon, but government-backed lenders have stepped in to fill the gap. The Federal Reserve has expanded its credit by $1.2 trillion over the past year; Fannie Mae and Freddie Mac have become the principal sources of mortgage finance. So maybe we can let the economy fix the banks instead of the other way around.
But there are many things that could go wrong.
It's not at all clear that credit from the Fed, Fannie and Freddie can fully substitute for a healthy banking system. If it can't, the muddle-through strategy will turn out to be a recipe for a prolonged, Japanese-style era of high unemployment and weak growth.
Actually, a multiyear period of economic weakness looks likely in any case. The economy may no longer be plunging, but it's very hard to see where a real recovery will come from. And if the economy does stay depressed for a long time, banks will be in much bigger trouble than the stress tests -- which looked only two years ahead -- are able to capture.
Finally, given the possibility of bigger losses in the future, the government's evident unwillingness either to own banks or let them fail creates a heads-they-win-tails-we-lose situation. If all goes well, the bankers will win big. If the current strategy fails, taxpayers will be forced to pay for another bailout.
But what worries me most about the way policy is going isn't any of these things. It's my sense that the prospects for fundamental financial reform are fading.
Does anyone remember the case of H. Rodgin Cohen, a prominent New York lawyer whom The Times has described as a "Wall Street éminence grise"? He briefly made the news in March when he reportedly withdrew his name after being considered a top pick for deputy Treasury secretary.
Well, earlier this week, Mr. Cohen told an audience that the future of Wall Street won't be very different from its recent past, declaring, "I am far from convinced there was something inherently wrong with the system." Hey, that little thing about causing the worst global slump since the Great Depression? Never mind.
Those are frightening words. They suggest that while the Federal Reserve and the Obama administration continue to insist that they're committed to tighter financial regulation and greater oversight, Wall Street insiders are taking the mildness of bank policy so far as a sign that they'll soon be able to go back to playing the same games as before.
So as I said, while bankers may find the results of the stress tests "reassuring," the rest of us should be very, very afraid.
Copyright 2009 The New York Times Company

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What Caused the Economic Crisis?

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GlobalResearch.ca

Warren Buffett called them "weapons of mass destruction" in 2003.
President Bush said they had to be regulated.
So did the chairman of the Securities and Exchange Commission, and the current head of the Federal reserve.
As did the G-20 group of the world's 20 richest nations.
Former Federal Reserve Chairman Alan Greenspan - after being one of their biggest cheerleaders - now says they are dangerous.
And a Nobel prize-winning economist said they should be "blown up or burned", and we should start fresh.
What Are They Talking About?
What are the above-listed folks talking about?
A financial instrument called "credit default swaps" (CDS for short).
CDS are like an insurance contract, where the purchaser buys "insurance" that a company won't go out of business from a seller. If the company stays in business, the purchaser pays premiums to the seller, but if the company goes belly up, the seller has to pay the face value of the CDS "policy".
Why are CDS so dangerous?
According to the experts, CDS were largely responsible for bringing down Bear Stearns, AIG (and see this) and other giant financial companies.
Indeed, many leading experts say that CDS were the main cause of the financial crisis. As just 3 examples:

• Newsweek called CDS "The Monster that Ate Wall Street"


• Former SEC chairman Christopher Cox said "The virtually unregulated over-the-counter market in credit-default swaps has played a significant role in the credit crisis''


• And - as mentioned above- a Nobel economist is so concerned about them that he thinks that existing CDS contracts must be "blown up or burned"

I'll explain the reason that CDS are so dangerous in a future post (basically, they let the financial players to pretend that they had less risk, less stretched-too-thin leverage, and more stability then they really did). But for now, just keep in mind that some of the world's top financial experts say that they are extremely dangerous. They are not the only cause of the financial crisis, but they are one of the main causes.
But At Least the Risk from CDS is Over, Right?
But at least the risks from CDS are over, right?
Not exactly . . .
Credit default swaps continue to bring down large companies, partly because they make it less likely that the companies can restructure.
And one of the main reasons that banks have been hoarding the bailout money instead of lending to consumers it because of CDS.Wall Street firms and banks have been hoarding cash. As the Financial Times wrote on October 7th:

Banks are hoarding cash in expectation of pay-outs on up to $400bn (£230bn) of defaulted credit derivatives linked to Lehman Brothers and other institutions, according to analysts and -dealers.

And as Fox News put it:

Massive positions are just starting to be unwound in the credit default swaps market as tens of billions of dollars worth of these contracts are now getting settled in the aftermath of several high-profile flops.
Banks are hoarding cash in expectation of expected payouts on anywhere from $200bn to $1 tn-no one knows the amount, adding to volatility-for defaulted credit derivatives linked to the collapse of Lehman Brothers, the government's seizure of mortgage giants Fannie Mae and Freddie Mac, the government's rescue of American International Group, and the failure of Washington Mutual.

And guess where most of the AIG bailout went? Yup - to corporations which bought CDS from AIG. $13 billion dollars worth of the bailout money paid to AIG went to Goldman Sachs for CDS contracts. $40 billion dollars worth of AIG's bailout money (and see this) went to foreign banks for CDS contracts. (Even AIG's former chief said that the government used AIG "to funnel money to other institutions, including foreign banks").
Unless something is done to change things, taxpayers may have to continue shelling out bailout money to keep bailing out CDS contract-holders.
Well, At Least the Regulators are Bringing CDS Under control so That They Can't Cause Damage Indefinitely. Right?
Unfortunately, regulators have so far caved into lobbying pressure from those in the CDS industry, and have failed to take any decisive action to reign CDS in.
As Newsweek writes:

Major Wall Street players are digging in against fundamental changes. And while it clearly wants to install serious supervision, the Obama administration--along with other key authorities like the New York Fed--appears willing to stand back while Wall Street resurrects much of the ultracomplex global trading system that helped lead to the worst financial collapse since the Depression.
At issue is whether trading in credit default swaps and other derivatives--and the giant, too-big-to-fail firms that traded them--will be allowed to dominate the financial landscape again once the crisis passes. As things look now, that is likely to happen. And the firms may soon be recapitalized and have a lot more sway in Washington--all of it courtesy of their supporters in the Obama administration...
The financial industry isn't leaving anything to chance, however. One sign of a newly assertive Wall Street emerged recently when a bevy of bailed-out firms, including Citigroup, JPMorgan and Goldman Sachs, formed a new lobby calling itself the Coalition for Business Finance Reform. Its goal: to stand against heavy regulation of "over-the-counter" derivatives, in other words customized contracts that are traded off an exchange...
Geithner's new rules would allow the over-the-counter market to boom again, orchestrated by global giants that will continue to be "too big to fail" (they may have to be rescued again someday, in other words). And most of it will still occur largely out of sight of regulated exchanges...
The old culture is reasserting itself with a vengeance. All of which runs up against the advice now being dispensed by many of the experts who were most prescient about the crash and its causes--the outsiders, in other words, as opposed to the insiders who are still running the show.

Credit default swaps may continue to deepen the economic crisis and prevent a recovery - and cause future crises - unless regulators stand up to the lobbyists and take real action to reign them in.

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Cyberspies Hack Into U.S. Fighter Project: Report

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Wired.comComputer spies have repeatedly breached the Pentagon's costliest weapons program, the $300 billion Joint Strike Fighter project, The Wall Street Journal reported on Tuesday.
The newspaper quoted current and former government officials familiar with the matter as saying the intruders were able to copy and siphon data related to design and electronics systems, making it potentially easier to defend against the plane.
The spies could not access the most sensitive material, which is kept on computers that are not connected to the Internet, the paper added.
Citing people briefed on the matter, it said the intruders entered through vulnerabilities in the networks of two or three of the contractors involved in building the fighter jet.
Lockheed Martin Corp is the lead contractor. Northrop Grumman Corp and BAE Systems PLC also have major roles in the project. Lockheed Martin and BAE declined comment and Northrop referred questions to Lockheed, the paper said.
The Journal said Pentagon officials declined to comment directly on the matter, but the paper said the Air Force had begun an investigation.
The identity of the attackers and the amount of damage to the project could not be established, the paper said.
The Journal quoted former U.S. officials as saying the attacks seemed to have originated in China, although it noted it was difficult to determine the origin because of the ease of hiding identities online.
The Chinese Embassy said China "opposes and forbids all forms of cyber crimes," the Journal said.
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Congress nibbles on edges of wealth gap

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Minnesota Independent

As Washington policymakers screamed bloody murder last month over bonus payments for a few hundred AIG employees, another much larger scandal flew virtually unnoticed on Capitol Hill: The divide between the wealth of blacks and whites -- already gaping -- grew again. Now, as Congress prepares to consider a series of consumer-friendly finance reforms, some minority advocates, researchers and lawmakers are pointing to that startling trend as another reason the reforms are urgently needed.
"We need to work together to begin to attack the institutional and structural reasons why communities of color continue to lag so far behind white families," said Rep. Barbara Lee (D-Calif.), who chairs the Congressional Black Caucus.
The concerns were justified last month. According to the Federal Reserve, the net worth of the typical African American family in 2007 was just 10 percent of the net worth of the typical white family -- down from 12 percent in 2004. Put another way: For every $1 held by whites five years ago, blacks had 12 cents. Three years later, they had a dime.
"This is not just a gap. It's a deepening canyon," Meizhu Lui, director of the Closing the Racial Wealth Gap Initiative at the Oakland-based Insight Center for Community Economic Development, wrote in a Washington Post op-ed last month. "The overhyped political term 'post-racial society' becomes patently absurd when looking at these economic numbers."
The staggering statistic has taken some powerful lawmakers by surprise. Participants in a wealth gap summit on Capitol Hill last month said that House Majority Leader Steny Hoyer (D-Md.), who attended the event, was shocked to learn the extent of the disparity.
But incredulity is one thing; closing the gap is another. And congressional lawmakers with that goal in mind face a series of barriers to getting the job done. Not only is there little recognition that such a divide exists, but the causes, according to reform advocates, are so rooted in history and engrained in policy that they're tough to iron out. Furthermore, the solutions reside largely in tax code reforms -- among the thorniest issues to tackle on Capitol Hill. Advocates for closing the wealth gap say that congressional lawmakers are well behind the curve.
"In terms of them really grappling with it," Lui said Friday, "I don't think they've done that yet. There's plenty of room for them to address this further."
It won't be easy. Advocates are pushing to reverse the Bush-era tax cuts, like those slashing the capital gains and estate taxes, which provide handsome benefits to those with accumulated wealth, but do almost nothing to help Americans of color, whose assets are a fraction of those held by white's.
"People aren't thinking in terms of wealth, it's always about income," Lui said of the public policy focus. "But income alone won't do it."
Thomas Shapiro, professor of law and social policy at Brandeis University, said additional tax reforms could include a shift in the mortgage interest deduction to benefit lower-valued homes and the creation of another deduction for renters -- controversial ideas that "no one's really talking about," he said.
"When the issue is something like the racial wealth gap," he said, "it's very difficult to think of policy levers [as solutions]."
That the wealth disparity is so wide is largely attributable to prejudiced policies both public and private. Advocates and academics point out that some of the largest federal benefit programs of the last century propped up whites but largely excluded minorities. The G.I. Bill, for example, provided $120 billion in low-interest mortgage loans to servicemen after World War II, yet less than 2 percent went to minorities before 1962, Liu found. And the Depression-era Home Owners' Loan Corporation, created to modify mortgages to prevent foreclosures, benefited no minorities whatsoever, she said.
More recently, Harvard University discovered that, among blacks and whites of similar incomes, lenders targeted blacks more often for sub-prime loans, even when those minority borrowers were eligible for less risky arrangements.
To combat that trend, advocates and some Democrats are pushing for the creation of a Financial Products Safety Commission, a concept championed by Elizabeth Warren, who chairs the congressional panel created to oversee the Wall Street bailout. A Senate bill, sponsored by Sen. Richard Durbin (D-Ill.) would do just that. The commission would regulate financial products, like mortgage loans and credit cards, much the same way the Consumer Products Safety Commission protects buyers from faulty coffee makers and lawn chairs. Sens. Charles Schumer (D-N.Y.) and Edward Kennedy (D-Mass.) have also sponsored the bill.
The release of the Fed's latest Survey of Consumer Finances, a triennial assessment of American financial trends, reveals that such policies have taken their toll. The report found that, as a group, people of color held roughly 16 cents for every $1 held by whites in 2007. For Hispanics, the figure was 12 cents. For blacks, a dime. And those figures were crunched before the collapse of the economy. Advocates fear that the gap probably widened since then because, while fewer minorities than whites own their homes, minority homeowners tend to have a higher percentage of their wealth wrapped up in their homes.
Similarly, blacks and Hispanics have fewer credit cards, but tend to drive up higher debts per card. As a result, said Jose Garcia, associate director for research and policy at Demos, a liberal policy group, "more of [minorities'] income goes to pay debt, and less goes to buy assets."
Minority advocates are also wary of payday lenders, who tend to charge exorbitant rates and target minority communities where traditional banks are often scarce. "Billions of dollars are being taken out of low- and moderate-income communities as a result of these alternative financing schemes," Shapiro said.
Not that Congress isn't doing anything at all. Legislation to help homeowners by empowering bankruptcy judges to alter mortgage terms passed the House last month, though it's since stalled in the Senate. Democratic leaders are also preparing to take up bills tackling predatory lending and credit card abuses. Another proposal to rein in payday lenders is also on the Democrats' radar screen.
Speaking at the wealth gap summit last month, Lee said that reforming these industries to protect minority communities is long overdue. "Too many communities do not have access to traditional banks and rely too heavily on payday lenders and check cashing stores that charge uncontrolled fees and out of sight interest rates," Lee said. "We must work together to use this financial storm to demand the institutional reforms that will begin to lift all American families out of this crisis."
Reform advocates say they're heartened by such statements coming from Capitol Hill, but many remain wary that few lawmakers are sticking their necks out to close the wealth gap.
"They were very friendly and very encouraging," Shapiro said of the congressional participants at the summit, "but nobody was stepping up and saying, 'I want to be the champion of this.'"
Mike Lillis is Congress reporter for the Washington Independent.

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Top Obama Bank Watchdog to Call for CEO Heads to Roll, Attacks Geithner-Summers Plan

Image by Getty Images via Daylife

AlterNet

Elizabeth Warren, chief watchdog of America's $700bn bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration's approach to saving the financial system from collapse.
Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government's Troubled Asset Relief Program (TARP), is also set to call for shareholders in those institutions to be "wiped out." "It is crucial for these things to happen," she said. "Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade." She declined to give more detail but confirmed that she would refer to insurance group AIG, which has received $173bn in bailout money, and banking giant Citigroup, which has had $45bn in funds and more than $316bn of loan guarantees.
Warren also believes there are "dangers inherent" in the approach taken by treasury secretary Tim Geithner, who she says has offered "open-ended subsidies" to some of the world's biggest financial institutions without adequately weighing potential pitfalls. "We want to ensure that the treasury gives the public an alternative approach," she said, adding that she was worried that banks would not recover while they were being fed subsidies. "When are they going to say, enough?" she said.
She said she did not want to be too hard on Geithner but that he must address the issues in the report. "The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous."
The report will also look at how earlier crises were overcome -- the Swedish and Japanese problems of the 1990s, the US savings and loan crisis of the 1980s and the 30s Depression. "Three things had to happen," Warren said. "Firstly, the banks must have confidence that the valuation of the troubled assets in question is accurate; then the management of the institutions receiving subsidies from the government must be replaced; and thirdly, the equity investors are always wiped out."

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The world economy is tracking or doing worse than during the Great Depression

Vox EU

To summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.
The good news, of course, is that the policy response is very different. The question now is whether that policy response will work.

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Maddoff Was A Piker -- America's Big Banks Are a Far Larger Fraudulent Ponzi Scheme

Image by Getty Images via Daylife

One of America's top bank fraud experts explains the financial industry's "liar's loans" and wholesale greed that got us in this mess.

Want to know what happened in our biggest banks? Bill Moyers Journal in past weeks has been the best source of the truth I've found. This is a must read/see piece this week.
Transcript is here: AlterNet
Previous weeks video and transcripts are here: Moyers Journal The latest will be posted soon. This one is really good!
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Geithner's 'Dirty Little Secret': The Entire Global Financial System is at Risk

GlobalResearch.ca

US Treasury Secretary Tim Geithner has unveiled his long-awaited plan to put the US banking system back in order. In doing so, he has refused to tell the 'dirty little secret' of the present financial crisis. By refusing to do so, he is trying to save de facto bankrupt US banks that threaten to bring the entire global system down in a new more devastating phase of wealth destruction.
The Geithner Plan, his so-called Public-Private Partnership Investment Program or PPPIP, as we have noted previously is designed not to restore a healthy lending system which would funnel credit to business and consumers. Rather it is yet another intricate scheme to pour even more hundreds of billions directly to the leading banks and Wall Street firms responsible for the current mess in world credit markets without demanding they change their business model. Yet, one might say, won't this eventually help the problem by getting the banks back to health?
Not the way the Obama Administration is proceeding. In defending his plan on US TV recently, Geithner, a protégé of Henry Kissinger who previously was CEO of the New York Federal Reserve Bank, argued that his intent was 'not to sustain weak banks at the expense of strong.' Yet this is precisely what the PPPIP does. The weak banks are the five largest banks in the system.
The 'dirty little secret' which Geithner is going to great degrees to obscure from the public is very simple. There are only at most perhaps five US banks which are the source of the toxic poison that is causing such dislocation in the world financial system. What Geithner is desperately trying to protect is that reality. The heart of the present problem and the reason ordinary loan losses as in prior bank crises are not the problem, is a variety of exotic financial derivatives, most especially so-called Credit Default Swaps.
In 2000 the Clinton Administration then-Treasury Secretary was a man named Larry Summers. Summers had just been promoted from No. 2 under Wall Street Goldman Sachs banker Robert Rubin to be No. 1 when Rubin left Washington to take up the post of Vice Chairman of Citigroup. As I describe in detail in my new book, Power of Money: The Rise and Fall of the American Century, to be released this summer, Summers convinced President Bill Clinton to sign several Republican bills into law which opened the floodgates for banks to abuse their powers. The fact that the Wall Street big banks spent some $5 billion in lobbying for these changes after 1998 was likely not lost on Clinton.
One significant law was the repeal of the 1933 Depression-era Glass-Steagall Act that prohibited mergers of commercial banks, insurance companies and brokerage firms like Merrill Lynch or Goldman Sachs. A second law backed by Treasury Secretary Summers in 2000 was an obscure but deadly important Commodity Futures Modernization Act of 2000. That law prevented the responsible US Government regulatory agency, Commodity Futures Trading Corporation (CFTC), from having any oversight over the trading of financial derivatives. The new CFMA law stipulated that so-called Over-the-Counter (OTC) derivatives like Credit Default Swaps, such as those involved in the AIG insurance disaster, (which investor Warren Buffett once called 'weapons of mass financial destruction'), be free from Government regulation.
At the time Summers was busy opening the floodgates of financial abuse for the Wall Street Money Trust, his assistant was none other than Tim Geithner, the man who today is US Treasury Secretary. Today, Geithner's old boss, Larry Summers, is President Obama's chief economic adviser, as head of the White House Economic Council. To have Geithner and Summers responsible for cleaning up the financial mess is tantamount to putting the proverbial fox in to guard the henhouse.
The 'Dirty Little Secret'
What Geithner does not want the public to understand, his 'dirty little secret' is that the repeal of Glass-Steagall and the passage of the Commodity Futures Modernization Act in 2000 allowed the creation of a tiny handful of banks that would virtually monopolize key parts of the global 'off-balance sheet' or Over-The-Counter derivatives issuance.
Today five US banks according to data in the just-released Federal Office of Comptroller of the Currency's Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.
The five are, in declining order of importance: JPMorgan Chase which holds a staggering $88 trillion in derivatives (€66 trillion!). Morgan Chase is followed by Bank of America with $38 trillion in derivatives, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs with a 'mere' $30 trillion in derivatives. Number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain's HSBC Bank USA has $3.7 trillion.
After that the size of US bank exposure to these explosive off-balance-sheet unregulated derivative obligations falls off dramatically. Just to underscore the magnitude, trillion is written 1,000,000,000,000. Continuing to pour taxpayer money into these five banks without changing their operating system, is tantamount to treating an alcoholic with unlimited free booze.
The Government bailouts of AIG to over $180 billion to date has primarily gone to pay off AIG's Credit Default Swap obligations to counterparty gamblers Goldman Sachs, Citibank, JP Morgan Chase, Bank of America, the banks who believe they are 'too big to fail.' In effect, these five institutions today believe they are so large that they can dictate the policy of the Federal Government. Some have called it a bankers' coup d'etat. It definitely is not healthy.
This is Geithner's and Wall Street's Dirty Little Secret that they desperately try to hide because it would focus voter attention on real solutions. The Federal Government has long had laws in place to deal with insolvent banks. The FDIC places the bank into receivership, its assets and liabilities are sorted out by independent audit. The irresponsible management is purged, stockholders lose and the purged bank is eventually split into smaller units and when healthy, sold to the public. The power of the five mega banks to blackmail the entire nation would thereby be cut down to size. Ooohh. Uh Huh?
This is what Wall Street and Geithner are frantically trying to prevent. The problem is concentrated in these five large banks. The financial cancer must be isolated and contained by Federal agency in order for the host, the real economy, to return to healthy function.
This is what must be put into bankruptcy receivership, or nationalization. Every hour the Obama Administration delays that, and refuses to demand full independent government audit of the true solvency or insolvency of these five or so banks, inevitably costs to the US and to the world economy will snowball as derivatives losses explode. That is pre-programmed as worsening economic recession mean corporate bankruptcies are rising, home mortgage defaults are exploding, unemployment is shooting up. This is a situation that is deliberately being allowed to run out of (responsible Government) control by Treasury Secretary Geithner, Summers and ultimately the President, whether or not he has taken the time to grasp what is at stake.
Once the five problem banks have been put into isolation by the FDIC and the Treasury, the Administration must introduce legislation to immediately repeal the Larry Summers bank deregulation including restore Glass-Steagall and repeal the Commodity Futures Modernization Act of 2000 that allowed the present criminal abuse of the banking trust. Then serious financial reform can begin to be discussed, starting with steps to 'federalize' the Federal Reserve and take the power of money out of the hands of private bankers such as JP Morgan Chase, Citibank or Goldman Sachs.
F. William Engdahl is author of A Century of War: Anglo-American Oil Politics and the New World Order; and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation (www.globalresearch.ca). His newest book, Full Spectrum Dominance: Totalitarian Democracy in the New World Order (Third Millennium Press) is due out at end of April. He may be reached through his website, www.engdahl.oilgeopolitics.net.

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White House sets tough deadline to force overhaul of ailing US carmakers

Image via Wikipedia

StarTribune.com

President Barack Obama refused further long-term federal bailouts for General Motors and Chrysler, saying more concessions were needed from unions, creditors and others before they could be approved. He raised the possibility Monday of controlled bankruptcy for one or both of the beleaguered auto giants.
At the same time, eager to reassure consumers, Obama announced the federal government would immediately begin backing the warranties that new car buyers receive -- a step designed to signal that it is safe to purchase U.S.-made autos and trucks despite the distress of the industry.
In a statement read at the White House, Obama said he was "absolutely committed" to the survival of a domestic auto industry that can compete internationally. And yet, "our auto industry is not moving in the right direction fast enough," he added.
With his words, Obama underscored the extent to which the government is now dictating terms to two of the country's iconic corporations, much as it has already taken an ownership stake in banks, the insurance giant AIG and housing titans Fannie Mae and Freddie Mac.
In an extraordinary move, the administration forced the departure of Rick Wagoner as CEO of General Motors over the weekend, and implicit in Obama's remarks was that the government holds the ability to pull the plug on that company or Chrysler.
Uncertainty about the industry's fate sent stocks tumbling, with the Dow Jones industrial average losing as much as 300 points in midday trading.
Ford Motor Co., the third member of the Big 3, has not requested federal bailout funds, and was not included in the president's remarks.
The Bush administration late last year approved $17 billion in federal funds to help GM and Chrysler survive. It also demanded both companies submit restructuring plans that the Obama administration would review.
Even as he pronounced their effort unsatisfactory, the president said the administration will offer General Motors "adequate working capital" over the next 60 days to produce a reorganization plan acceptable to the administration.
He said Chrysler's situation is more perilous, and the government will give the company 30 days to overcome hurdles to a merger with Fiat SpA, the Italian automaker. If they are successful "we will consider lending up to $6 billion to help their plan succeed," Obama said.
He also announced several steps to reassure consumers, and improve the chances that U.S. automakers will be able to sell their cars and trucks.
The president said the government will now stand behind warrantees issued by the carmakers, a sweeping new guarantee that some in Congress had sought.
He also noted that the economic stimulus legislation he recently signed allows the purchasers of new domestic cars to deduct the cost of any sales and excise taxes. Obama said this provision could "save families hundreds of dollars and lead to as many as 100,000 new car sales."
He also said funds ticketed for the purchase of new vehicles for government agencies would be spent as quickly as possible. The president was flanked by numerous administration officials as he spoke, including Treasury Secretary Tim Geithner.
Obama spoke at the White House with U.S. automakers at yet another crossroads. As the president noted, the industry has shed more than 400,000 jobs in the past year as the recession took hold. Officials announced last week bailout funds would be made available to companies that supply the automakers, an attempt to keep them afloat.
Obama said he is committed to the survival of an auto industry -- on terms that will allow it to compete internationally.
"But we also cannot continue to excuse poor decisions," he said. "And we cannot make the survival of our auto industry dependent on an unending flow of tax dollars."
He also said some of the industry's progress has scarcely been noticed. He mentioned that the North American car of the year in 2008 was produced by GM.
"Let me be clear: The United States government has no interest in running GM; we have no intention in running GM," Obama said.
But that was at the same time he was formally announcing the departure of Wagoner, whom administration officials forced into retirement on Sunday in preparation for the president's remarks.
"This is not meant as a criticism of Mr. Wagoner, who has devoted his life to this company; rather it's a recognition that it will take a new vision and new direction to create the GM of the future," Obama said.
Other changes at GM include new directors on its board. Fritz Henderson, GM's president and chief operating officer, became the new CEO. Board member Kent Kresa, the former chairman and CEO of defense contractor Northrop Grumman Corp., was named interim chairman of the GM board.
"The board has recognized for some time that the company's restructuring will likely cause a significant change in the stockholders of the company and create the need for new directors with additional skills and experience," Kresa said in a written statement.
The Obama move comes amid public outrage over bonuses paid to business leaders and American International Group executives -- set against a severely ailing economy.
GM failed to make good on promises made in exchange for $13.4 billion in government loans. Chrysler, meanwhile, has survived on $4 billion in federal aid during this economic downturn and the worst decline in auto sales in 27 years. In progress reports filed with the government in February, GM asked for $16.6 billion more and Chrysler wanted $5 billion more.
GM owes roughly $28 billion to bondholders. Chrysler owes about $7 billion in first- and second-term debt, mainly to banks. GM owes about $20 billion to its retiree health care trust, while Chrysler owes $10.6 billion.
GM and Chrysler employ about 140,000 workers in the U.S. In February, GM said it intended to cut 47,000 jobs around the globe, or almost 20 percent of its work force, close hundreds of dealerships and focus on four core brands -- Chevrolet, Cadillac, GMC and Buick.

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