The Fed’s Exit Problem: Symptom of Paradigm Breakdown? Listen to this article. Powered by Odiogo Yves here. This Real News Network interview with Yilmaz Akyüz, chief economist at the South Centre and former director and chief economist at UNCTAD, focuses on the conundrum of the Fed’s need to exit from QE from an international perspective, and layers in the further complication that China is not going to keep up its investment spending at the same level. Akyüz argues that “….we have problems at the end of the crisis which are as big as the ones during the crisis, and these problems are largely due to mismanagement of the crisis, particularly in the U.S. and Europe.” But I’m not sure it’s as simple as mismanagement. I’ve believed we are at the end of an economic paradigm, and the way out of those in the past has been breakdown. In ECONNED, I listed four theories, and I believe the last was the most problematic: Cognitive regulatory capture, meaning the regulators have adopted the industry worldview, which makes them reluctant to act. Extortion, meaning that the financial services industry controls infrastructure that is essential to capitalism, and cannot be displaced except at very high cost. Think of what happened to the civilization at Ur when the king shut down the overly powerful lenders. State capture, meaning the financial services industry now has the status of oligarchs in third world countries, having used its economic clout to buy so much political influence that they largely dictate policy regarding its interests. Paradigm breakdown, meaning key elements of the current system are no longer viable, but that is a possibility that no one is prepared to face, since the old system seemed to work well for a protracted period. Thus the authorities reflexively put duct tape on the machinery rather than hazard a teardown. All these factors play a role in the hesitance to impose tough reforms, but the most intractable and least recognized is the last, the difficulty of seeing that the failings of the current system are deeply rooted and not amenable to simple remedies. Any resolution of the major problems facing the financial system would take a good deal of time, care, and persistent effort, and would simultaneously be highly politicized. That makes it very likely that the financial services industry will derail or blunt reform efforts. That in turn means the current paradigm will be patched up and restored to service only to fail again. This pattern will replay until the breakdown is beyond repair… One of the troubling features of the discussion of the crisis has been the recognition of the role of so-called global imbalances as a factor in the debt binge in the U.S. and other advanced economies, and the widespread attitude of resignation towards that problem. The tacit assumption is that the United States cannot act unilaterally. The US first took a posture of benign neglect, but the administration is taking a slightly different tack. The focus of the G20 discussions has shifted from banking reform to the nebulous notion of creating a framework for addressing global imbalances. Ironically, the financial crisis has led to miraculous progress. The US trade deficit has fallen sharply because scarce credit has strangled consumption and trade financing. But exhortations to meet medium term goals, far enough away that no one will be held accountable for failing to meet them, is simply another way to kick the can down the road. Similarly, the policy of the authorities in the United States has been explicitly to try to shore up asset values, out of the belief that we discussed earlier, that the markets are simply wrong about the need for housing prices and other financial assets to correct. Yet numerous analyses have found that residential real estate price in many markets, including the United States, the UK, Ireland, Spain, Australia, the Baltics, and much of Eastern Europe, rose to levels well out of line with historical relationships to income and rentals. There was also pervasive underpricing of credit risk, as noted in the Bank of England’s April 2007 stability report. Yet the strategy of the powers-that-be has been to try to restore status quo ante. Albert Einstein defined insanity as “doing the same thing over and over again and expecting different results.” It is one thing to try to patch up what you have on an emergency basis due to the need to respond quickly, and quite another to regard that as a viable long-term solution. The situation we are in now echoes that of the Great Depression. Although scholars still debate its causes eighty years later, a persuasive view comes from MIT economics professor Peter Temin. Temin, in his Lessons from the Great Depression (1989), first sets forth the prevailing explanations and explains why each falls short. He argues that the culprit was the impact of the World War I on the gold standard. Recall that starting roughly in 1870s, major European economies increasingly adopted the gold standard, and a long period of prosperity resulted. The regime was suspended in the UK and the major European powers during the war. Afterwards, they moved to restore it, sometimes at considerable cost (England, for instance, suffered a nasty downturn in the early 1920s). But the aftereffects of the war meant the Edwardian period framework was unworkable. The deflationary forces they set in motion could have been countered by countercyclical measures after the Great Crash. But that was impossible with the gold standard. Indeed, as Temin notes, “Holding the industrial economies to the gold-standard last was about the worst thing that could have been done.” Now readers may have trouble with that comparison, particularly since the conventional wisdom is that our policy responses have been so much better than those of the early 1930s. But the key point here is that the institutional framework locked the major actors into a particular set of responses. They were not able to see other paths out because they conflicted with an architecture and a set of beliefs that had comported themselves well for a very long time. It’s hard to think outside a system you grew up with. And remember, the gold standard did not break down overnight; the process took more than a decade. Back to the current post. So it’s not surprising that experts like Akyüz see only grim outcomes and no ready way out. The incumbents are simply unwilling to risk, both politically and economically, the degree of intervention needed to come up with or even ease the way to a new set of institutional arrangements. Ideas like a jobs guarantee, which would be far more salutary than a lot of other alternatives, are dismissed as too far out to even get a serious hearing. The authorities have done an impressive job of keeping a badly impaired system limping along, and it might even have periods of credible-looking improvement. But as Herbert Stein said, “If something cannot go on forever, it will stop.” So the end game seems inevitable, even if the timing is unclear. More at The Real News Topics: Credit markets, Doomsday scenarios, ECONNED, Economic fundamentals, Federal Reserve, Politics, The dismal science Email This Post Email This Post Posted by Yves Smith at 2:56 am 78 Comments » Links to this post AddThis Who Should Young People Throw Under the Bus: Granny or Billionaire Hedgie Stan Druckenmiller? Listen to this article. Powered by Odiogo I pointedly avoid New York Times columnist Thomas Friedman; you can glean everything you need to know about him from the official Thomas Friedman Op/Ed Generator or some of Matt Taibbi’s lambastings (see here, here, and here for examples). So without attempting to wade too deeply into the goo of Friedman’s latest column, let’s limit ourselves to the the fact that Friedman is running PR for former Soros Fund Management lead investor Stan Druckenmiller. The column also serves to illustrate how Serious People like Friedman were ready to jump on the deficit cutting bandwagon once the shutdown/debt ceiling drama was put to rest for a bit. Druckemiller’s latest cause is to foment generational warfare. He’s going to college campuses and telling students that things suck (which they know full well) and they need to go after Boomers who are gonna get too much in entitlements if things don’t change. Now from what I can infer, the presentation is sophisticated, since Druckenmiller throws other big Federal spending items into the mix, like defense. But the fact that he depicts tax rates as a problem is a major tell. Curiously, for someone who says he’s a friend of Druckenmiller, Friedman is remarkably circumspect about Druckemniller’s political history. Druckemniller has not only been one of two or three biggest Republican donors for the better part of two decades, he’s been firmly aligned with the aggressive “shrink government/cut taxes” effort, back to being a strong ally of Newt Gingrich. For Druckemmiller to point at Boomers and act as if he’s part of the solution, as opposed to one of the long-standing proponents of tax cuts, which among other things were one of the big causes in the rise in government debt levels under George Bush, is remarkably disingenuous. Similarly, Friedman mentions in passing Druckenmiller’s successful bet against subprime as a reason to take him seriously. As we discussed in ECONNED at length, the supbrime shorts, most importantly Magnetar, were what turned what would have been a S&L level housing crisis into a global financial meltdown. The use of credit default swaps on subprime mortgages created exposures that have been estimated at 5-6 times that of the value of mortgages. The synthetic side bets were a multiple of the real economy borrowings. As we explained in 2010: The current number one non-fiction best seller, Michael Lewis’ The Big Short: Inside the Doomsday Machine…Lewis’ tale is neat, plausible to a mass market audience fed a steady diet of subprime markets stupidity and greed, and incomplete in critical ways that render his account fundamentally misleading…. Lewis repeatedly and incorrectly charges that no one on Wall Street, save his merry band of shorts, understood what was happening, because everyone blindly relied on ratings and failed to make their own assessment. By implication, the entire mortgage industry ignored the housing bubble and the frothiness of the subprime market. This is simply false (although with Bernanke and the persistently cheerleading US business media largely missing this story at the time, the “whocouldanode” defense is treated more seriously than it should be). Many people in the credit markets were aware that the risks were increasing in the subprime and residential real estate markets. Every mortgage industry conference during this period had panels on this topic, every credit committee considered it throughout 2005-07… Lewis completely ignores the most vital player, the one who was on the other side of the subprime short bets. The notion that “it’s a CDO” is daunting enough to stop the non-financial reader in his tracks. The author is remarkably uncurious about who the end investors were for CDOs. Listen up. Who really was on the other side of the shorts’ trades is the important question. And the section in which Lewis finally gets around to that (more than halfway thought the book, reader sympathies to his key actors now firmly established) hides the fundamental flaw in his narrative in plain sight: …whenever Eisman sets out to explain the origins of the subprime crisis, he’d start with his dinner with Wing Chau [a CDO manager]. Only now did he fully appreciate the central importance of the so-called mezzanine CDO – the CDO composed mainly of BBB rated subprime mortgage bonds – and its synthetic component, the CDO composed entirely of credit default swaps on triple-B rated subprime mortgage bonds. “You have to understand this,” he says. “This was the engine of doom.”… All by himself, Chau generated vast demand for the riskiest slices of subprime mortgage bonds. This demand had led inevitably to the supply of new home loans, as material for the bonds. Yves here. It wasn’t all by himself, as we will see soon: ….the sorts of investors who handed money to Wing Chau, and thus bought the triple A rated traches of CDOs – German banks, Taiwanese insurance companies, Japanese farmer’s unions, European pension funds, and in general, entities more or less required to invest in AAA rated bonds -did precisely so because they were supposed to be foolproof, impervious to losses, and unnecessary to monitor of think about very much. Yves again. Note that these are the international equivalent of widows and orphans, but because they are exotic, presumably elicit less sympathy. But as we will discuss soon, by this point in the tale, January 2007, that list of prototypical chumps was out of date, which has further implications for the real significance of this trade. Starting in mid-2005, when the creation of a standardized credit default swap on mortgages made it feasible to take large subprime short positions, a system quickly developed that overrode the normal checks and balances of the market and allowed the unscrupulous to 1. Profit from making bad loans, and 2. Force the creation of more bad loans, which would both increase their profits and make it more likely that their bet would be successful… The subprime market would have died a much earlier, much less costly death absent the actions of the men Lewis celebrates. They didn’t simply keep the market going well past its sell-by date, they were the moving force behind otherwise inexplicable, superheated demand for the very worst sort of mortgages. His “heroes” were aggressively trying to find toxic waste to wager against. But unlike short positions in heavily-regulated equity markets, these wagers, the credit default swaps, had real economy effects. The use of CDOs masked the nature of their wagers and brought unwitting BBB protection sellers to the table, which lowered CDS spreads (and as in corporate bond markets, CDS dictate, via arbitrage, interest rates for bond issues) and pushed down the interest rates on the cash bonds backed by those same loans, which in turn made it perversely attractive for lenders to generate mortgages with the worst characteristics. And it isn’t surprising that weak-credit borrowers were enticed by this once in a lifetime “opportunity”. Back to the current post. So why are the young people Druckeniller trying to incite against their elders in such terrible shape? There’s an immediate factor and a longer-term trend. The immediate one is the aftermath of the global financial crisis, which has produced disastrously high levels of unemployment for the young, particularly college graduates. And Druckemmiller doesn’t bear some vague general guilt as a member of the financial services industry that emerged more powerful as a result of this event; he actually bears considerably more responsibility than most by having taken out huge bets against subprime that drove demand to the worst sort of mortgages and had way too many fragile, levered, critically positioned financial institutions on the wrong side of the trade. For instance, on of the parties on the other side of Druckenmiller-style bets were monolines. When they went seen as being at risk, the auction rate securities market froze because monolines were also guarantors of municipal bonds, and everyone knew this short-term muni paper would fall in value as the monolines were downgraded. The result was that interest rates jumped to the parties that had issued this paper, helping to wreck the budgets of cities and transit authorities. That’s only one example of the many sorts of collateral damage that resulted from the remarkably lucrative subprime short bet. And if you widen the frame, this country has been through a protracted and successful campaign to revise the social contract to favor capital over labor. You can see its success in the accelerating rise in income inequality, the lack of economic mobility, and the huge corporate profit share. Warren Buffet claimed that a level of over 6% of GDP wasn’t sustainable; depending on how you measure it, it’s currently at over 10%, some peg it as high as 12%. That rise in corporate profit share has come at the expense of employment and wage growth. The policy shift started under Carter, but the old model of having companies share the benefit of productivity gains and basing overall prosperity on wage growth was abandoned in the Reagan/Thatcher era for one that favored asset price growth and used rising levels of consumer leverage to mask stagnant wages. Druckenmiller was a huge backer of the politicians that promoted those programs. Yet he has the temerity to try to turn young people against ordinary folks in their 50s and 60s, most of which who never had any political influence, when he was a major sponsor of the very policies that have helped impoverish American youth. Perhaps Druckenmiller is making such an aggressive and public disinformation tour because he knows that if young people were to turn on the old, he’d be one of the most deserving targets for their vengeance. Topics: ECONNED, Hedge funds, Politics, Taxes, The destruction of the middle class Email This Post Email This Post Posted by Yves Smith at 6:59 am 112 Comments » Links to this post Former Representative Brad Miller: Naked Capitalism – My Hot Sheet on Finance Listen to this article. Powered by Odiogo This is Naked Capitalism fundraising week. 61 donors have already invested in our efforts to shed light on the dark and seamy corners of finance. Join us and participate via our Tip Jar or another credit card portal, WePay in the right column, or read about why we’re doing this fundraiser and other ways to donate, such as by check, as well as our current goal, on our kickoff post. By Brad Miller, who was a member of the U.S. House of Representatives from 2003 to 2013 and is now Of Counsel to the law firm of Grais & Ellsworth LLP Matt Taibbi described in “How Wall Street Killed Financial Reform” the many ways “the banks strangled the Dodd-Frank law,” including the effort by House Republicans after the 2010 election to “pass a gazillion loopholes.” “You might wonder,” Taibbi wrote, “how a bunch of lunkhead Republican Congressmen would even know how to write a coordinated series of ‘technical fixes’ to derivatives legislation, a universe so complicated that it has become hard to find anyone on the Hill who truly understands the subject. (One Congressman who sits on the Financial Services Committee laughingly admitted that when the crash of 2008 happened, he had to look up ‘credit default swaps’ on Wikipedia.)” Yeah, that was me. I don’t remember going off the record with Taibbi and he quotes me by name elsewhere in the article, but he probably assumed that no Congressman would publicly admit to being that clueless. I tell that story all the time, and in public. How was I supposed to know about credit default swaps? Congress put derivatives beyond the reach of federal and state regulation in 2000, two years before I was elected to Congress. In the time I had been in Congress there had not been a single hearing in the Financial Services Committee on derivatives. It turned out that jurisdiction for derivatives legislation was disputed between the Financial Services Committee and the Agriculture Committee, since derivatives were originally a way to hedge commodity prices. The Agriculture Committee wasn’t on the case either. And that was just the way the industry wanted it. In the industry’s view, nothing good would come from Congress asking questions about derivatives. Certainly no lobbyist said one word to me about derivatives, except to celebrate derivatives as the kind of innovation that can only come from unfettered capitalism. Robert Crouch’s testimony on behalf of the Mortgage Bankers Association on November 5, 2003, was typical. Crouch said that “through innovations in the mortgage finance industry, and through various financing and risk enhancing tools created for the specific purpose of extending credit to our more needy communities, credit-impaired individuals now have ample opportunity to obtain loans through this ‘non-prime,’ or ‘sub-prime’ market.” Credit default swaps were one of those nifty new tools that made subprime mortgages possible. So by the time I finished reading the Wikipedia entry, I may have known more about credit default swaps than any other Member of Congress. The megabanks’ influence in Washington is not just about campaign money, although I might have a hard time convincing Sherrod Brown of that right now. There’s the revolving door between Capitol Hill and the industry. It is hard for Congressmen, Senators and key staff not to think about how good life must be on the other side. Regular Naked Capitalism readers already know about the revolving door. See this, this and this. There is much more to the industry’s power in Washington, however. The industry has a near-monopoly on critical information. Equally important, their approval is highly valued, whether consciously or unconsciously, by policymakers and opinion leaders. The leaders of the financial industry are impressive. They are fabulously rich, schooled in the social graces, well-educated and well-spoken. Who would not want to be held in their good opinion? Yves discusses “cognitive capture” in Econned, citing Willem Buiter. Buiter explained the response of policymakers to the financial crisis as “cognitive regulatory capture,” in which “those in charge of the relevant state entity internaliz[e], as if by osmosis, the objectives, interests and perceptions of reality of the vested interest they are meant to regulate.” (Buiter was a prominent academic economist at the London School of Economics when he wrote that. He has since become the chief economist for Citigroup.) James Kwak, who blogs at Baseline Scenario, argues that the acceptance of the virtue of financial deregulation was largely the result of “cultural capture,” or “an idea that people adopt in part because of the prestige it confers.” When leaders of the financial industry dismiss “populist” proposals as “well meaning” and perhaps appealing to the uninformed rabble, but simplistic and counterproductive, many in Washington want to agree. Getting past the many cultural cues of seriousness and credibility, the “perceptions of reality” and the need for approval, to the substance requires an ability to distinguish gravitas from pomposity – a rarity in Washington. After the financial crisis, however, a few in Washington were unwilling to take the industry’s word for it that the crisis was a “perfect storm” of unforeseeable macroeconomic events, and certainly not the result of blameworthy conduct. I was one of them. So I’m perversely proud to have read Wikipedia for a source of information not completely controlled by the industry. And I was even reduced to reading blogs for information, including Naked Capitalism. Naked Capitalism does not always come with the cultural cues of seriousness and credibility upon which we are accustomed to relying. Bill Black wrote that Naked Capitalism was an “indispensable source” of “bluntness (in a world plagued with euphemisms and excuses).” Black may himself be guilty of resort to euphemism in that description. But the information here, however incandescent the tone, is generally correct, and comes with links to other authority. Naked Capitalism says what the industry won’t, and is an important alternative to “the captured superstars of the media who long ago transformed their brand of journalism into an access-based celebration of the elites and the status quo,” to use Neil Barofsky’s (not at all euphemistic) phrase. In Men In Black, the Tommy Lee Jones character turns to “hot sheets” for tips that an alien had landed on earth. The “hot sheets” turn out to be supermarket tabloids. “Best investigative reporting on the planet,” he said to a disbelieving Will Smith. “But go ahead, read The New York Times if you want. They get lucky sometimes.” I still read The New York Times, but I contributed $100 to Naked Capitalism today so reformers on Capitol Hill and elsewhere will have an important hot sheet on “the dark and seamy corners of finance.” Topics: Banana republic, Banking industry, ECONNED, Guest Post, Politics Email This Post Email This Post Posted by Yves Smith at 11:40 am 46 Comments » Links to this post Quelle Surprise! More Proof that the FCIC was a Whitewash, Thanks to Angelides and Born Listen to this article. Powered by Odiogo William Cohan has a damning account in the Sunday New York Times, “Was This Whistle-Blower Muzzled?” on how the Financial Crisis Inquiry Commission actively suppressed information that would inconvenience America’s favorite zombie bank, Citigroup. Recall that Sheila Bair’s book Bull by the Horns depicted in riveting detail how she engaged in a protracted battle with pretty much all the other regulators, with the Treasury leading the charge, to try to resolve or at least seriously clean up Citigroup, which by all the metrics the FDIC had (and even some OCC measures) was far and away the sickest big bank. Even though Bair could have put down the US depositary on her own authority, the other financial regulators withheld information about the operations not under the FDIC’s purview, which was almost half the bank. As much as she felt Citi needed to be put down, she felt she could not do so when she both had all the bank supervisors opposed to her and she was at an information disadvantage (that is, they’d pillory her even if their data confirmed what she was seeing, and because it was confidential supervisory information, she would be unable to get it divulged). At least Bair put up a tenacious fight about Citi, even though Geithner, an acolyte of its board member Bob Rubin, used every bureaucratic device he could find to stymie her (Neil Barofsky has separately described how underhanded and persistent Geithner is, frequently working through cat’s paws). By contrast, another person who tried exposing the extent of the rot at Citi when it should have been safe to do so, long after the worst of the crisis was over, found himself blocked by people who were supposedly tasked with getting to the bottom of the crisis. Richard Bowen III, a Citi executive who was chief underwriter of consumer lending, started warning the board in early 2006 that the bank was making way too many bad and fraudulent loans and could eventually face large losses. Increasingly desperate, he wrote Rubin in November 2007, which looks to have signed his death warrant at the global bank. Bowen demanded an outside investigation, which confirmed his allegation that mortgage lending controls had broken down in 2005. Nevertheless, CEO Chuck Prince signed the Sarbanes Oxley certification stating that the bank’s controls were sound (star NC pupils know that Sarbanes Oxley violations can serve as the basis for criminal prosecutions). Fast forward to the Financial Crisis Inquiry Commission in 2010. Bowen was contacted early on. He gave a four hour taped interview which led to him being asked to testify in public. Here is the germane section of Cohen’s article: On March 22, J. Thomas Greene, the commission’s executive director, gave Mr. Bowen a week to write a statement to accompany his April 7 oral testimony. Mr. Bowen says he was told he could have 30 pages…. On March 30, one of Mr. Bowen’s attorneys, Steve Kardell, a partner at the Dallas law firm Clouse Dunn, told Mr. Bowen, in an e-mail, that the F.C.I.C.’s Mr. Bondi suggested “some substantial changes” to his testimony and “thinks that the way it’s written now, Citi will declare war on both you and the F.C.I.C., and it will primarily consist of an effort to discredit you.” While Mr. Kardell noted that the F.C.I.C. investigators said they didn’t want to influence his testimony, he said that Mr. Bondi suggested trimming it by 10 pages. Peeved, Mr. Bowen instructed him to find out what changes the F.C.I.C. staff wanted to make. The next day, Mr. Kardell e-mailed Mr. Bowen, “I get the impression that the revisions are non-negotiable.” Mr. Bowen says the F.C.I.C. wanted him to delete his concern that Citi may have materially misrepresented its certifications of internal controls, which require corporate officers to certify the accuracy of their financial statements under Sarbanes-Oxley. Remove the names of people at Citi, he says he was told. Take out his post-Rubin denouement, his conversations with the bank’s internal lawyers and the fact that Citigroup’s outside attorneys at Paul, Weiss, Rifkind, Wharton & Garrison LLP were conducting an investigation of his charges. Mr. Kardell also said he thought the F.C.I.C. was “catching some serious, serious heat this morning.” “Who are they catching heat from?” Mr. Bowen asked, according to a transcript of the call provided by Mr. Bowen. “Umm, Citi,” Mr. Kardell replied, adding, “It’s just a complete all battle stations with Citi about you testifying.” He then dropped the bombshell that Brad S. Karp, managing partner of the law firm Paul, Weiss, had “gotten involved” and that “our guys” on the F.C.I.C. staff, “who are still extremely pro Dick Bowen — although I think there’s pressure to yank Dick Bowen — our guys want to see something plain vanilla pretty fast.” A stunned Mr. Bowen told Mr. Kardell, “So much for an independent Congressional commission.” One of the appalling facts of modern life is when the head of a heavyweight white shoe firm throws his weight behind protecting a big client, he is pretty much assured of getting cooperation. That’s just how things work in corrupt elite America. The fact that the FCIC was a whitewash is hardly news. Bowen’s four hour taped interview was not among those made available in the FCIC archives. Perversely, some but not all the ones of small fry like yours truly were. But this was just a part of their pattern of covering up for the powerful. We had noted in 2010 that the FCIC had planned to release the audios of all the interviews but then reversed themselves. We asked in early 2011 Why are Half of the FCIC Interviews Being Withheld?: Another mystery is why so many interviews are being withheld. When they interviewed me in November (and yes, sports fans, my interview is up on the FCIC site), I was informed that 600 interviews would be released. I’m told by people close to the investigation that not all interviews were recorded; this was an oversight early in the process, but starting in July, all were apparently taped. Now we already know that interviews of Certain Big Kahunas are being withheld, most notably that of Ben Bernanke (which was conducted in 2009 and thus illustrates that at least some of the pre-July sessions were recorded). But that is not a sufficient explanation. The FCIC’s press release indicates that the staff met with over 700 witnesses; only “more than 300″ are to be made public, with 213 released initially and the rest added by now, since the FCIC is now officially no more. Our Tom Adams was interviewed in December and his conversation was not posted. Why would this be? His position is contrary to the report’s narrative; is that why he was excluded? Or is there a less nefarious reason why he and many others were left on the cutting room floor: that they weren’t name brands? For my taste, far too many of the well known individuals included in the roster were economists who were simply not close enough to what happened to provide much in the way of new perspective. And if you want to point fingers at why the commission turned out to be a well-packaged regurgitation of conventional wisdom which conveniently blamed everyone except specific executives at major financial firms (if everyone is to blame, then no one can be held to account), look no further than Phil Angelides and Brooksley Born. Yes, the commission was hamstrung by design; for instance, Congress subjected it to having to get approval of commissioners from both parties to issue a subpoena, which pretty much vitiated that power. But if Angelides and Born had been serious, they could have stared down the likes of Brad Karp. Recall that what brought Nixon down was the Saturday Night Massacre, when he ordered special prosecutor Archibald Cox be fired. Attorney General Elliot Richardson and Deputy Attorney General William Ruckelshaus resigned in protest. It would not have created that level of turmoil, but if Angelides and Born resigned rather than be bullied by banksters and their law firm hired guns, the media consternation would have had more impact than the commission report ever did. And it was obvious at the time that both had been compromised. We sat in on the press call when the report was released, and wrote it up in FCIC Insider: “I Can’t Believe They Suborned Brooksley Born”: I participated in a blogger conference call with FCIC commissioners Phil Angelides and Brooksley Born. I’m clearly not cut out for public life. It was disconcerting to hear them thumping their talking points. For instance, Angelides began by saying that the purpose of the report was to explain why we faced the choice in 2008 of spending billions of dollars to bail out the financial system or let it fail. That’s a false dichotomy that serves to justify the unprecedented rescues. It implies that the only way the crisis could have been addressed was the course of action taken. We pointed out as the crisis was unfolding that some of the early interventions made matters worse. Even at the peak of the crisis, a range of other actions were possible but were not taken. The bias throughout the crisis was to throw money at the problem with virtually no strings attached, and even in the cold light of day, to take far too little in the way of corrective and punitive measures. But the stunning part were Angelides’ and Born’s answers to my questions. I’ve been in communication with several disaffected insiders. And contrary to the efforts of Born and Angelides to depict critics as the dissenters (meaning the Republicans), these observers feel the investigation was inadequate and the report excluded critical drivers of the crisis. They have told me in some detail about how the staff performed its work in a vacuum. They reported that the commissioners spent virtually no time with the team leaders, did not provide input into the thinking process or interviews. They also complained of poor resource allocation decisions: that nearly 2/3 of the staff time was taken up with arranging and preparing for the public hearings, which were not terribly productive. And to add insult to injury, the staff prepared questions for the hearings only to find the commissioners ignoring them. Another problem area was the difficulty in getting subpoenas issued…Here, with the commission having a very tight schedule to begin with, stonewalling would be a rational strategy, and my sources tell me that happened on a widespread basis, particularly after the firms under the spotlight began to see that subpoenas were unlikely to be issued…. Born stressed how many pages were produced (ahem , quantity is not tantamount to relevance), how this undertaking was even larger than the complex litigations she had overseen, and how much staff effort went into analyzing the material. I then asked how much time the commissioners spent with the lead investigators and staff. Angelides said “a ton” and that it varied by commissioner, but that he and Born “dove in”. But if you listened carefully, they did NOT discuss how they worked with staff, but that they read memos, listened to interviews, and so on. I called one of my contacts immediately afterwards and played back the exchange. The reaction: “I can’t believe they suborned Brooksley Born”. The insider disputed the account, saying that the commissioners did not give the staff any insight into their thinking nor did they participate in the interview process (either providing questions or participating in any interviews to get a feel for the process; listening to them afterwards or reading transcripts is just not the same). Others close to the investigation confirmed his report. While Born was brave enough in 1996 to engage in a pitched battle with much more powerful figures in Washington to regulate credit default swaps and suffer a humiliating loss, she has not bucked the system in a more fundamental way. Her participation in the FCIC gave it an aura of respectability and seriousness. To see her defend a flawed process and product shows either a lack of discernment or a misguided sense of loyalty to a diseased system. It is unpleasant to face up to the fact that quite a few of the people who are lauded as courageous were not as brave as their PR would lead you to believe. Yes, Born as the new head of the CFTC posed the question of whether credit default swaps should be regulated, faced unified opposition from the other financial regulators, and was embarrassed before Congress by having it vote to exclude her from even studying CDS and putting the matter in the hand of “senior regulators” meaning bank cronies. She left office with her tail between her legs and didn’t speak up until it was safe to, after CDS blew up. It’s the people like Bowen who put their careers on the line who deserve public approval, not the ones who buck the system a bit, get slapped, and then go back to being complaint. Unfortunately, we have way too many Potemkin heros presented as the real thing in order to preserve the legitimacy of a corrupt ruling class. Topics: Banana republic, Banking industry, Credit markets, Derivatives, ECONNED, Politics, Regulations and regulators Read more at nakedcapitalism/category/econned
Posted on: Wed, 20 Nov 2013 03:33:31 +0000
Trending Topics
Recently Viewed Topics
© 2015