Deceptive Lobbying on Derivatives

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EDITOR’S COMMENT: Once again Simon JOhnson hits the nail on the head. Those of you who want a more sophisticated picture of this mortgage mess along with the macro-economic view would do well to visit

With the latest move in New York allowing legal aid to homeowners in foreclosure, the number of contested cases is going to go through the roof. If other states follow, the battle will be on, not in pieces but across the country. The entire securitization infrastructure is an illusion. It is written, but next to the facts, it is a piece of fiction. At least a quarter of the $600 trillion in notional value of derivatives is based on home mortgages that are fatally defective, where liability is in doubt and the amount demanded is far off the actual amount due after set-offs due to the borrower under law.

The only thing left for the mega banks to do is to try to push a legislative reset button, even if it is illegal, immoral, and unconstitutional. They want to scare the hell out of us telling us that if we even touch their system, another 130,000 jobs will be lost. It is is now well-established that this was a planted article with absolutely nothing to back it up. Johnson hits them where it hurts in his comment (see below).

Today's Economist

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

On Capitol Hill this week, a serious debate is under way about whether to carry out an important part of the new Dodd-Frank rules for derivatives – with hearings in the House on Tuesday and in the Senate on Thursday.

Much of the discussion has focused on the report produced by Keybridge Research for a group called the Coalition for Derivatives End Users that purports to show the dangers of extending the rules to nonfinancial companies (the so-called end users in this context).

In testimony on Tuesday before the House Financial Services Committee, Gary Gensler, the chairman of the Commodity Futures Trading Commission, pleased the Republican majority by saying the rules should not apply to nonfinancial companies that buy derivatives but “only on transactions between financial entities.”

Representative Spencer Bachus, Republican of Alabama and the committee’s chairman, responded: “I want to applaud Chairman Gensler. Members on the majority think it’s critically important that we don’t impose margin or clearing requirements on end users.”

Yet the Keybridge Research report – as exposed by Andrew Ross Sorkin in The New York Times on Tuesday – engaged in an extraordinary, shocking misrepresentation, asserting its credibility by claiming affiliations with respected academics who have now asked that their names be removed from the consulting firm’s Web site. Some of those listed as advisers said they had had no relationship with the firm.

The report is, in fact, pure lobbying disguised as research. For their own self-interest, the big banks want customers who can undertake derivatives transactions without reasonable constraints – and these banks want to disguise this self-interest in a veneer of social interest.

Republican committee members cited the report in arguing against the rules.

This coalition for end users does not represent the best interests of such actual end users; rather, it is a front for the big banks that dominate the market in over-the-counter derivatives.

The coalition has no good arguments to back up its assertions that properly implementing Dodd-Frank will result in significant job losses. In fact, as Mr. Sorkin reports, Keybridge has serious credibility problems.

As Joseph E. Stiglitz, a Nobel laureate in economic science, points out to Mr. Sorkin, at the heart of the report is a preposterous argument – that if we subsidize insurance, jobs will be created.

If someone made this point in regard to fire insurance or property and casualty insurance (particularly for American companies, which these days have around $2 trillion in cash), they would be dismissed out of hand. But the mystique – and confusion – surrounding derivatives is such that the material in this report will be taken seriously by many on Capitol Hill.

The only people who can really gain from this subsidy are the bankers who buy and sell derivatives. The actual end users are being duped by the banks. Perhaps you don’t feel bad about that – but such duping is very dangerous for financial-system stability. (See this post by my colleague John Parsons, who cuts nicely to the analytical heart of the matter – and who also dismisses the Keybridge report.)

The acknowledgment by so many firms that they have weak risk models is revealing and extremely worrisome (see Section 4.3 on page 4 of the report).

These firms are apparently relying on the banks to advise them on risk, but the banks have a strong vested interest in a more highly leveraged financial system. That leaves the nonfinancial firms gambling recklessly with their investors’ money. I hope tough questions will be asked about this at annual general meetings and in boardrooms.

The high level of profit in over-the-counter derivatives gives it all away. The real end users should bring in truly independent economic consultants, who can tell them that this level of profit is a clear indication that the market for O.T.C. derivatives is nowhere near competitive.

The end users are being ripped off – and then providing political support to the banks responsible for it. A serious management failure – and the issue of fiduciary responsibility – is clear at the nonfinancial firms surveyed in the Keybridge report.

We are looking at market power masquerading as lobbying on behalf of customers. This would be a laughable combination – were it not for the fact that this coalition did immeasurable damage to financial regulation last year, and is dead set on further undermining Mr. Gensler and his colleagues at the C.F.T.C. in the coming weeks.

We need responsible restraint in the over-the-counter derivatives market, in the face of the banks’ fierce determination to prevent this.

28 Responses

  1. john gault,
    Yeah but what I’m saying (and trying to get everyone’s opinion on) is don’t attorneys and more importantly judges realize that throwing in Twombly’s “mere labels” and “legal conclusions” they are in effect discrediting all precedent quoted and cited by them and the judge(s) (including Twombly and Iqbal).

  2. PS As to Twombley, the truth is that every time one of us says hey these guys are trying to take my home and they have presented no evidence they should take my home, a justiciable matter has been raised. A justiciable issue is one in which a conflict exists. From what I’ve seen, I can say that 99% of the time when , at the time the bad guy’s rely on Twombley, the record does NOT in fact evidence their right to do so.
    Twombley stands for the proposition that one must state a claim for relief. The bad guys by throwing in ‘Twombley’ are saying your protest about the bad guys snarfing your home with no evidence of their right to do so does not create a reason the court should hear your case! We all know they’re trying to take our homes with no evidence, so it’s time to move to the law books, especially if you live in an area where there is not one attorney to be found to take this on. That’s where we need to get organized as a group.

  3. I now have a physical reaction to “Twombley”, and I am so not kidding. I have a zillion bad-guy motions to dismiss in my litigation catalog, and every stinking one of them refers to that stinking case.
    But the truth is usually that its application is crap; most of us just didn’t or don’t know any better.

    But, those guys are organized, like with the stinking “White Paper”, which is instruction on how to manipulate us and the courts. We don’t have collectively anyone leading the parade and doling out missives to handle all the irrational bs in court.
    I have yet to see a lawyer fork over one of his or her pleadings for the benefit of us peons. We are left to stumble thru blogs and uploads and then try to fashion it into something which applies to us and which we can use to defend our homes.

  4. cubed2k,
    We should wall off D.C. too. Turn them both into Zoo exhibits or something.

  5. Huffington Post Meetup: Happening March 8th. In every city. If it’s NOT happening in your city, you can make it happen.

    Here’s the link.

    Go to your city in the upper right hand corner. If it’s NOT listed, make one!


  6. Well Charlie,

    I have to tell you Madoff ripped off a bunch of RICH people. Like who really gives a rats ass. It’s not like he ripped of normal working folk. But the media generalizes it and paints a picture of poor little o’ folks getting ripped off.

    Read today on article by Rolling Stones Matt T.

    After reading Matt, images of the movie Escape from New York came to mind. Maybe we should do that, wall off New York and let Wall Street/Congress/bankers and the hard criminals have a playing ground, and let the rest of the world get on with the business of living. But, then I realized, maybe the whole planet is already Escape From New York, ie Hosni Mubarak as another example.

  7. Karen
    Where does this go from here?

  8. Did I say something wrong?
    Where’s the beef???

  9. If you have a job with a company that cannot go out of business (and if you do not get that I mean the flipping government then you are too dumb to get the rest of this) then you have a hell of alot of nerve bitching because the rest of us who are broke can no longer afford to pay you the exorbitant salaries and benefits that your fatcat union lobbyists have procured for you. you want to keep getting paid the same or take less of a cut then get rid of the union and take all the money the union spends on lobbying and split that up and then come tell me I need to give you more!!!!!!!!!!!

  10. Karen Pooley Huffington Post and Dylan Ratigan RULE

  11. The Party is starting in Wisconsin


  12. Karen,
    I agree!
    We need to organize the people that are reading this as, well as all the other sites reporting this crime.
    You mentioned huffington post but I did not find a connection.
    Do you, or anyone out there, know a better way to get this going? Or if there is something I am missing, let me know.
    I for one, am ready to take this up a few notches.

  13. @Kim Thomas,
    You know, you and I are friends so I will excuse that bullshit that you just posted.

    You are on this website ADVERTISING BABCOCK’s business and no one calls you out for it. But, if you try to make this YOUR blog and things have to be done YOUR way, I will start calling you out.

    I am fucking pissed today and I can write whatever the hell I want to. If you don’t want to fucking read it, that is your perogative.

  14. The mental stumbling block, for most Americans, is that financial crimes don’t feel real; you don’t see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They’re crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let’s steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They’re attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone’s claims of ownership equally. When that definition becomes tenuous or conditional — when the state simply gives up on the notion of justice — this whole American Dream thing recedes even further from reality.

  15. Please i know of frustration but lets keep it clean on the blog.Thank you!

  16. Hey, I want everyone’s opinion on this.

    For those of us that end up in Federal Court one way or another and get hit with the old 12(b)(6) Twonbly-Iqbal “mere labels” and “legal conclusions” defense. When that is used for an affirmative defense without supplying any facts supporting the grounds for dismissal.

    Shouldn’t the motion technically be defeated by its own standard?

    Seen as quoting and citing precedent without identifying the any applicable points or facts supporting it as proper authority, they’re only providing the Twonbly-Iqbal “mere labels” and “legal conclusions” themselves. And the defense itself is still governed by Rule 8’s pleading standards as well.

  17. I was reading an article this morning on how Madoff was being interviewed in Jail by some writer that’s working on a book about the ponzy scheme that he, Mr. Maddof brilliantly and shamelessly executed to defraud many investors and others of billions of dollars, as I read on I felt very happy that the scum bag is behind bars for good now; then……it dawned on me that he is the “little fish” “the apprentice” the “greenhorn” of all thieves, and it scared the hell out of me just to think about all the “BIG FISH”, the masterminds of the biggest illegal ON YOUR FACE rip off perhaps EVER of American history that are still free and running around attempting to laugh right on our faces and keep on stealing right from our pockets…….and infuriated me to see how hard they are at work at every part of our system trying to legalize their illegal activities. Somehow in my heart i believe that this time it’ll be different for the scum bags, the gap is closing on them every day, and the american people are more and more informed nowadays than ever before thanks to the internet, it’s not so easy to hide one’s wrongdoing anymore as it might’ve been even 25 years ago when things would just be swept under the rug and keep at it, the world is changing, our nation is changing and along with it the way we have access to information has changed drastically making it much much harder for the thieves to run with their loot. God bless and protect our glorious and beloved America.

  18. Karen Pooley you are absolute;y correct. Apathy is a killer, we need to step on these b….s., I mean bugs.

  19. Karen, no apologies necessary….right there with you. Let them have it Egyptian style. Right there with you! Demand action and results.

  20. “It is is now well-established that this was a planted article with absolutely nothing to back it up.”

    Gee, that “nothing to back it up” certainly sounds familiar…kinda like our (so-called) mortgage backed securities?

  21. Oops, not “next” Tuesday.

    That would be TUESDAY, MARCH 8th.

    Organize the meeting in each and every listed city.
    Do it people.

  22. @Kickboxer,
    May I suggest to each and every one of you. Get on Huffington Post Meetup. Google it.

    They are calling for next Tues, March 8th, to be Mortgage Madness Meetup. WOULD YOU FUCKING ORGANIZE THIS MEETING IN EACH AND EVERY ONE OF YOU’S CITY. A national website is organizing us! Fucking get off your asses and organize it.

    Sorry, I am having a hormonal surge today, but I am sick and fucking tired of the fucking lack of attention people are making to these matters. We need each and every one of you to get off your couches. Get down to your legislatures and make as much hell as some of us are making.

    After my tirade today, I got three phone calls from my state Senators aide. I think he knows at this point I fucking mean business. I won’t take fucking no for a fucking answer. You’d better fucking listen to me or I will fucking organize a “Egypt solution to these issues.” Yep, I said that.

  23. We need to organize our own oversight panels. Citizen’s Oversight Panels. Every state should have one. The AGs should meet with us and tell us what, if anything, are they doing. Our representatives should also be meeting with us regularly to hear what the people want. We need a voice. We need our own voices to be heard. Our reps are not doing the job.

  24. Karen: Next time, take me with you down to Olympia. In fact, after the March 8th meeting you are planning, maybe we will have more people. Why are we waiting for March 8th?

    I would have been happy to go to Oly and get fucking pissed off with you!


  25. I am fucking pissed fucking off. I have been working hard since AUGUST trying to get the attention of my state and federal Senators to enact meaningful legislation to protect the homeowners. I was just told today that there is nothing I can do at this point to get any further amendments through on any bill. I was given an hour with my local Senator. She was half asleep and taking notes, but she pawned me off to a Senator that was supposedly enacting legislation regarding MERS. Set up a meeting with this Senator (taking half-day vacation and gas to drive an hour and a half to meet with him.) I was given FIVE FUCKING minutes to explain to this douchebag what MERS was. HE WAS SUPPOSEDLY WRITING LEGISLATION ON A COMPANY HE DIDN’T KNOW THE FIRST FUCKING THING ABOUT! Then, I was told to meet with the Chairman of the Financial Institutions, Housing and Insurance Committee. Asked for a meeting, wanted to bring my attorney just so she could give her experience with dealing with the laws on-the-street experience. By the time I reached my attorney and asked if the time scheduled would be do-able, the fucking aide had given away the time that he promised me.

    No wonder people believe that our fucking elected officials are pieces of shit. Before, it was my belief that people just didn’t work hard enough to get heard. NOW, I know better. Now I can CONFIRM they are pieces of shit. Every standing member of Congress needs to be booted “Egyptian Style.”

  26. that is Virginia for you all, the legislators and their staff just bend over and take from the banks.

    the citizens in this former grand state are just serves in a corporatr feudal system.

    remember they do not care about you they care about being relected and traveling in private jets to some exotic caribean island to make their deposits

  27. Karen Pooley- exactly right- I think that your anger will let you prevail- “…why give 30,000 dollars to an entity that has no title interest in my property” EXACTLY! And THAT is the point of this entire website! All that entity has to do is PROVE that they are entitled to your 30k, and they cannot do that, without fabricated, forged,backdated, illegally attested and notarized documents- trap them in their own lies, and then sue them for every dime they have- they don’t own anything.

  28. I am thoroughly disgusted by my state and federal elected Senators. I have been working overtime trying to introduce legislation that is meaningful. Because I don’t have a fucking $30,000 check to hand over to them…..I get nothing.

    The bank lobbyists are doing a damn good job. But one thing I am doing is putting these staff members on the spot. “How much money is required to get legislation slipped by? I am a homeowner in distress and the only legislation you can seem to put forth to this legislature is a fucking mandatory mediation? REALLY? Why the hell would I go into mediation with an entity that has no title interest in my property? Please tell me, I fucking waiting.”

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