Wisdom Succumbs to Wise Guys

It is difficult to imagine anything more obvious than splitting the risk taking core model of Wall Street from the risk averse core model of banking. The dilution of Glass-Steagel over the years and its eventual repeal is exactly how we got into this mess. Coupling that with deregulation and non-transparency created a context in which (moral hazard) theft was legal and inevitable on a scale unimaginable at any other time in history. Former FED Chairman Volker, 82, has the perspective to see all of the history of mistakes and triumphs from the long view. Yet his view is being routinely ignored by the Obama administration whose loyalty to their roots on Wall Street is greater than their commitment to the country. Volker is being treated as window dressing covering over the continuation of drastically stupid policies with horrendous results for ALL U.S. Citizens.
Brave souls like Marcy Kaptur, Elizabeth Warren, Sheila Baer, are getting stepped on so that our government, captured by the financial sector, can go about the business of siphoning off liqulidity from an economy that desperately needs it returned to its rightful place. Thus a government whose prime directive is the common defense and common welfare completely abdicates its role under cover of “rational” policies in what has always been an irrational world.    
The rationality and complexity of their arguments leads the populace to a confused state of non-comprehension and docile compliance as we are led down a path to yet another disaster that will in all probability alter the order of society, stability of governments and opportunity for despots. The consent of the governed is being managed by those who know how to at least keep dissent down to a minimum (and then call it consent).
What started here on these pages as merely a research and self-help tool, is now the center of a growing movement by those who are in distress over the status of their country and not merely their homes. Livinglies no longer promotes the interests of only those in financial distress now, but also the interests of all Americans whose lives are being turned into a path toward financial ruin for all of us. The recovery of homes and wealth in the courts is required not only for each individual to gain justice and fairness back from a corrupt system, but to our society as a whole.
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October 21, 2009 NY Times

Volcker Fails to Sell a Bank Strategy

Listen to a top economist in the Obama administration describe Paul A. Volcker, the former Federal Reserve chairman who endorsed Mr. Obama early in his election campaign and who stood by his side during the financial crisis.

“The guy’s a giant, he’s a genius, he is a great human being,” said Austan D. Goolsbee, counselor to Mr. Obama since their Chicago days. “Whenever he has advice, the administration is very interested.”

Well, not lately. The aging Mr. Volcker (he is 82) has some advice, deeply felt. He has been offering it in speeches and Congressional testimony, and repeating it to those around the president, most of them young enough to be his children.

He wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying no, it will not separate commercial banking from investment operations.

“I am not pounding the desk all the time, but I am making my point,” Mr. Volcker said in one of his infrequent on-the-record interviews. “I have talked to some senators who asked me to talk to them, and if people want to talk to me, I talk to them. But I am not going around knocking on doors.”

Still, he does head the president’s Economic Recovery Advisory Board, which makes him the administration’s most prominent outside economic adviser. As Fed chairman from 1979 to 1987, he helped the country weather more than one crisis. And in the campaign last year, he appeared occasionally with Mr. Obama, including a town hall meeting in Florida last fall. His towering presence (he is 6-foot-8) offered reassurance that the candidate’s economic policies, in the midst of a crisis, were trustworthy.

More subtly, Mr. Obama has in Mr. Volcker an adviser perceived as standing apart from Wall Street, and critical of its ways, some administration officials say, while Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, chief of the National Economic Council, are seen, rightly or wrongly, as more sympathetic to the concerns of investment bankers.

For all these reasons, Mr. Volcker’s approach to financial regulation cannot be just brushed off — and Mr. Goolsbee, speaking for the administration, is careful not to do so. “We have discussed these issues with Paul Volcker extensively,” he said.

Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities.

The Obama team, in contrast, would let the giants survive, but would regulate them extensively, so they could not get themselves and the nation into trouble again. While the administration’s proposal languishes, giants like Goldman Sachs have re-engaged in old trading practices, once again earning big profits and planning big bonuses.

Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street’s wild ways.

“The banks are there to serve the public,” Mr. Volcker said, “and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties” and ultimately fails.

The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company. It’s a tall order, and to achieve it Congress would have to enact a modern-day version of the 1933 Glass-Steagall Act, which mandated separation.

Glass-Steagall was watered down over the years and finally revoked in 1999. In the Volcker resurrection, commercial banks would take deposits, manage the nation’s payments system, make standard loans and even trade securities for their customers — just not for themselves. The government, in return, would rescue banks that fail.

On the other side of the wall, investment houses would be free to buy and sell securities for their own accounts, borrowing to leverage these trades and thus multiplying the profits, and the risks.

Being separated from banks, the investment houses would no longer have access to federally insured deposits to finance this trading. If one failed, the government would supervise an orderly liquidation. None would be too big to fail — a designation that could arise for a handful of institutions under the administration’s proposal.

“People say I’m old-fashioned and banks can no longer be separated from nonbank activity,” Mr. Volcker said, acknowledging criticism that he is nostalgic for an earlier era. “That argument,” he added ruefully, “brought us to where we are today.”

He may not be alone in his proposal, but he is nearly so. Most economists and policy makers argue that a global economy requires that America have big financial institutions to compete against others in Europe and Asia. An administration spokesman says the Obama proposal for reform would result in financial institutions that could fail without damaging the system.

Still, a handful side with Mr. Volcker, among them Joseph E. Stiglitz, a Nobel laureate in economics at Columbia and a former official in the Clinton administration. “We would have a cleaner, safer banking system,” Mr. Stiglitz said, adding that while he endorses Mr. Volcker’s proposal, the former Fed chairman is nevertheless embarked on a quixotic journey.

Alan Greenspan, the only other former Fed chairman still living, favored the repeal of Glass-Steagall a decade ago and, unlike Mr. Volcker, would not bring it back now. He declined to be interviewed for this article, but in response to e-mailed questions he cited two recent public statements in which he suggested that the nation’s largest financial institutions become smaller, so that none would be too big to fail, requiring a federal rescue.

Taking issue implicitly with the Volcker proposal to split commercial and investment banking, he has said: “No form of economic organization can fully contain bouts of destructive speculative euphoria.”

For his part, Mr. Volcker is careful to explain that he supports 80 percent of the administration’s detailed plan for financial regulation, including much higher capital requirements and “guidelines” on pay. Wall Street compensation, he said in a recent television interview, “has gotten grotesquely large.”

Before the credit crisis, the big institutions earned most of their profits from proprietary trading, and those profits led to giant bonuses. Mr. Volcker argues that splitting commercial and investment banking would put a damper on both pay and risky trading practices.

His disagreement with the Obama people on whether to restore some version of Glass-Steagall appears to have contributed to published reports that his influence in the administration is fading and that he is rarely if ever in the small Washington office assigned to him.

He operates from his own offices in New York, communicating with administration officials and other members of the advisory board mainly by telephone. (He does not use e-mail, although his support staff does.) He travels infrequently to Washington, he says, and when he does, the visits are too short to bother with the office. The advisory board has been asked to study, amid other issues, the tax law on corporate profits earned overseas, hardly a headline concern.

So Mr. Volcker scoffs at the reports that he is losing clout. “I did not have influence to start with,” he said.

18 Responses

  1. Martin, I agree that any forum is only as useful as it can stay focused on its chosen topic. However, it looks like he was inviting wider discussion with

    “Livinglies no longer promotes the interests of only those in financial distress now, but also the interests of all Americans … to gain justice and fairness back from a corrupt system…”

    Don’t you think? And I agree that it’s hard to both reach out and stay focused. I would further suggest that any political talk or discussion of forming a political movement be handled in a separate area, perhaps linked or tabbed, while keeping the foreclosure defense topic relatively pure, so it does not lose focus or relevance.

  2. END THE FED.

    Yes Ron Paul would support such a Debt Revolution, by sticking to Black Letter Law, a rejection of the banking industry is needed to restore Liberty.

    However, this forum is primarily for Foreclosure Defense, so we should respect the forum and its unwritten rules and subject matter protocols.
    I love and respect Ron Paul and his philosophy, and I also know how a site like this could be overwhelmed by political rhetoric.

    So lets stick to the topic of foreclosure defense, and trust that will lead to Liberty for all.

    FHCMaine

  3. angry&not taking it,

    Where I come from we call it, “The Three Card Molly”.
    You guess which is the King You WIN!
    Uhhh Not exactly…..

    Goldman ….. Lehman ….. AIG
    Con goes down…. Hey we’ll BURN the Lehman Card!
    (That way we can tell them all Hell’s breaking loose.)
    Save AIG(Ha! Ha!) use those chumps as a taxpayer pipeline.

    And guess who is KING? The Taxpayers … guessed wrong!

    Goldman! Goldman!
    (Yes they are Jekyll and Hyde…… Govt and Bankster)
    Surprised? He who has the GOLD makes the rules.

  4. Fyi

    Column on State Street Lawsuit
    CNBC: Pimping for State Street Bank?
    By California Attorney General Jerry Brown
    October 21, 2009

    If street thugs were to hold up a convenience store and drive off with $1 million, it would be national news. But when a venerable Boston bank rips off California’s two largest pension funds for $56 million, it’s business-as-usual – at least to the anchors of CNBC.
    State Street Bank – the world’s largest servicer of pensions – systematically ripped off CalPERS and CalSTRS over a period of eight years. It did this by adding a tiny surcharge on foreign currency trades. But this adds up, especially considering that some $35 billion in 42,000 transactions were traded by these funds since 2001.
    So when two whistleblowers filed suit under seal in April 2008, attorneys from my office immediately investigated – examining hundreds of thousands of pages of documents, interviewing witnesses and subpoenaing records.
    They found in the course of an 18-month investigation that State Street was contractually obligated to give CalPERS and CalSTRS the “interbank rate” at the precise time of the trade. Instead, State Street consistently charged at or near the highest rate of the day, even if the interbank rate was lower at the time of trade. And traders concealed the fraud by deliberately failing to include time stamp data in its reports, so that the pension funds could not determine the true execution costs.
    When the suit was filed, we notified the media and held a press conference – to bring the fraud to light and to deter other financial traders from considering similar action. This is a routine part of prosecuting important corporate fraud cases.
    But, in a commentary post today, CNBC anchor Michelle Caruso-Cabrera sneered at California’s effort to recover $200 million in damages and penalties, using a made-up quote from Elliot Spitzer to call it “quaint.”

    This follows an interview Tuesday that was straight out of the Daily Show. CNBC invited me on to talk about the case, and then Caruso-Cabrera asked why I would come on the air to talk about it.
    Her co-anchors seemed to have no problem with the rip-off (“as long as they quoted you a dollar and you paid the dollar, what do you care what they got it for”) and questioned the integrity of the whistleblowers (“that whistleblower – is that a private law firm that you guys have hired to do this for you?”) Unbelievable . And for the record, the whistleblowers are industry insiders who have yet to be named.
    The tone and substance of the interview are symptomatic of the Eastern financial elite, who think that $200 million is small potatoes, and big business should be given the benefit of the doubt.
    In my book, there’s nothing quaint about corporate fraud. There’s nothing quaint about ripping off pension funds. And, I – along with attorneys general from across the nation – will continue to bring these high-priced rip-off artists to justice.

    http://www.huffingtonpost.com/jerry-brown/is-cnbc-pimping-for-state_b_329034.html

    # # #
    You may view the full account of this posting, including possible attachments, in the News & Alerts section of our website at: http://ag.ca.gov/newsalerts/release.php?id=1824

  5. dont ever think that the real players in the bank game were on deaths bed. thats just foolish.it was a day lite robbery plain&simple.the other tip off was the GS/aig rues, its a kansas city shuffle.. everybody looks right .. you go left & thats all thats left…so everybody’s lookin right ..sayin…hey…what happen??
    jekyll island pay book.

  6. Dear Neil:
    Have you thought of teaming up with groups that have built up around Ron Paul? A lot of the work to actually return the gov’t to the “keep it simple” philosophy has been done by him and his Campaign for Liberty organization. Crusading for your cause is great, but actually moving things step by step is what needs to happen, and if you want a broad political movement, they are already there with a lot of the same simple steadfast common sense for the common man approach. All the best, and thanks!

  7. The central problem was the “mortgage” business.
    We have all forgotten the true meaning of a “mort” “gage”, namely “death gamble”. If the borrower dies first, the debt is due on death, if the
    lender dies (is dissolved) first, the debt is cancelled.
    In 2008, most of the “mortgage bankers” were on their death bed and would have died had the government not resuscitated them. This would have
    resulted in the borrowers owning their properties free and clear. For once the borrowers would have won the “death gamble”.
    Instead, our Government ,which is supposed to be
    neutral in these things, came to the rescue of the “mortgage lenders” instead of letting them “die” a natural death.
    Our government showed partiality towards “Wall Street” at the expense of “main street”.
    Mortgage lending has always attracted a criminal element and in many cases, they would cause them-selves to win the “death gamble” by underhanded methods. It is for this reason that they had to be licensed by the various States in order to try and prevent “predatory lending” ie the “loan to own” scams
    that were widespread. Loan a little against a property
    with lots of equity and try to cause the borrower to default (by nonpayment or an unfortunate accident)
    and seize the borrowers equity.
    The ending of Glass-Steigel caused the criminal
    element in mortgage lending to rejoice. Its return would take some of the profit out of mortgage lending for the criminal element and organized crime. That is why it should be done!

  8. I totally agree. Sad, isn’t it? I just posted a similar commentary. Sadly, the nation’s financial houses are apparently able to squeeze out even a credible voice that is no longer in their financial interest. I am much less surprised to find this going on, than that Barak Obama and those he has selected as his advisers are represented here as being on the side of the financial culprits. A case of cooptation, I believe. I’m assuming that Barak wants a second term pretty bad and is willing to… (you know)

  9. Great post, Neil. Frontline on PBS last night detailed how Brooksley Born as head of the Commodity Futures Trading Commission during the Clinton admin tried to regulate the derivatives market and was shut down by Greenspan, Summers, Geithner, Rubin & others. She saw the dangers of unregulated trading that got us into the mess we’re in now. Greenspan was a follower of Ayn Rand who believed in zero government intervention in the markets….Greenspan later admitted this was the wrong approach. Obama needs to replace Geither, Paulson & Summers with a totally NON-Goldman Sachs crew.

  10. Read ‘Web of Debt’ by Ellen Brown, J.D, *an attorney*

    You will understand this all.

    I have no connection to the author and I do not receive any fees from recommending her book.

    It is a darn good book and very understandable!!

    She tells us how we can break free. This crisis is much more organized than we realize.

  11. What is currently going on with our government and our economy has been very well planned for a very long time. These are indeed our final days.

  12. CRIMES AGAINST HUMANITY. WE NEED TO CHARGE THE JUDGES (THE FATHER AND MOTHER) THAT ARE LETTING THE BANKS (CHILDREN) TO CONTINUE TO GET AWAY WITH THIS.

  13. Excellent article !

    Most of us feel the weight of a new dictatorship on our shoulders .

    How our country has changed in the last few years.

    As a middle class person ..I see the public ransacking ,lying,cheating and stealing of our rights,and jobs and homes.

    The 3 Branch of powers .” .Justice-Congress-Executive ”
    seem to be a hallow , empty and foreign elite ..that is so involved in their own world …up in the Clouds with their Gods

    Money..Power. Privilege .

    That they lost sight of the people suffering injustice down here close to the ground.

    Our present Situation has been duplicated many , many times in history . When the people feel like pawns and slaves ..to a royal elite class ruling unjustly over them ..

    Stealing from them every last penny …

    A natural human reaction burns to the surface ..Anger !

    and the French Revolution and the Russian Revolution resulted in a volcanic explosion of hot vengence .

    When I see the Congress , the Politicians ..smiling while they stab us in the back ..I get Angry .

    The anger is building up …. but the Politicians are having a good old time with their Bankers ..partying in their Palaces..

    What a weight I feel on my shoulders … is it …that I am a
    beast of burden …made to carry some one else’s Bags of Gold and Silver ! while… I get the… I get the … the ..Carrot on a string..??

    LF.

  14. Well said Neil , . This is the biggest story that is really misunderstood and unreported. Keep up the great work !

  15. ***MELT THE SWITCH***

  16. ***END THE FED***

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