Big Banks Headed For Break-Up

“What policy makers are starting to realize is that the absence of prosecutions and regulatory action against these banks has produced a profound loss of confidence not only in the financial markets but in the leader of the financial markets (the United States) to control itself and its own participants in finance. It’s not just fair to enforce existing laws and regulations against the banks who so flagrantly violated them and nearly destroyed all the economies of the world, it’s the only practical thing to do.” — Neil F Garfield, livinglies.me
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Editor’s Comment: There is an old expression that says “At the end of the day, everybody knows everything.” The question of course is how long is the “day.” In this case the day for the bank appears to be about 10-12 years. The foibles of their masters, the conduct of their policies, and the arrogance of their behavior has led them into the position where the once unthinkable break-up of the bank oligopoly and their control, over our government is coming to a close.

The titans of Wall Street have thus far avoided criminal prosecution because of the misguided assumption — promulgated by Wall Street itself — that such prosecutions would destroy the economic systems all over the world (remember when Detroit arrogance reached its peak with “what’s good for GM is good for the country?”). But the Dallas Fed are joining the ranks of of once lone voices like Simon Johnson stating that Too Big to Fail is not a sustainable model and that it distorts the markets, the marketplace and our society.

It is virtually certain now that the mega banks are going to literally be cut down to size and that some form of Glass-Steagel will be revived. As that day nears, the images and facts pouring out onto the public and the danger to the American taxpayer facing deficits caused by the banks in part because they siphoned out the life-blood of liquidity from the American marketplace will overwhelm the last vestiges of resistance and the same lobbyists who were the king makers will be the kiss of death for re-election of any public official.

As they are cut down, the accounting and auditing will start and it will take years to complete. What will emerge is a pattern of theft, deceit, fraud, forgery, perjury and other crimes that are most easily seen in the residential foreclosures that now appear to be mostly illusions that have caused nightmare scenarios for millions of Americans and people in other countries. Those illusions though are still with us and they are still taken as real by many in all branches of government. The thought that the borrower should never have been foreclosed and that the amount demanded of them was wrong is not accepted yet. But it will be because of arithmetic.

Investment banks sold worthless bonds issued by empty creatures that existed only on paper without any assets, money or value of any kind. The banks then funded mortgages of increasingly obvious toxicity to people who might have been able to afford a normal mortgage or who couldn’t afford a mortgage at all but were assured by the banks that the deal was solid. Both investors and homeowners were taken to the cleaners. Neither of them has been addressed in any bailout or restitution.

It is the bailout or restitution to the investors and homeowners that is the key to rejuvenating our economy. Trust in the system and wealth in the middle class is the only historical reference point for a successful society. All the rest crumbled. As the banks are taken apart, the privilege of using “off-balance sheet” transactions will be revealed as a free pass to steal money from investors. The banks took the money from investors and used a large part of it to gamble. Then they covered their tracks with lies about the quality of loans whose nominal rates of interest were skyrocketing through previous laws against usury.

For those who worry about the deficit while at the same time remain loyal to their largest banking contributors, they are standing with one foot upon the other. They can’t move and eventually they will fall. The American public may not be filled with PhD economists, but they know theft when it is revealed and they know what should happen to the thief and the compatriots of the thief.

For the moment we are still rocketing along the path of assuming the home loans, student loans, credit cards, auto loans, furniture loans et al were valid loans wherein the lenders had a risk of loss and actually suffered a loss resulting from the non payment by the borrower. As the information spreads about what really happened with all consumer debt, housing included, the people will understand that their debts were paid off by the investment banks, the insurance, companies and the counterparties on hedge products like credit default swaps.

A creditor is entitled to be repaid the money loaned. But if they have been repaid, the fact that the borrower didn’t pay it does not create a fact pattern under which the current law allows the creditor to seek additional payment from the borrower when their receivable account is zero. Yet it is possible that the parties who paid off the debt might be entitled to contribution from the borrower — if they didn’t waive that right when they entered into the insurance or hedge contract with the investment banks. Even so, the mortgage lien would be eviscerated. And the debt open to discussion because the insurers and counterparties did in fact agree not to pursue any remedies against the borrowers. It’s all part of the cover-up so the transactions look like civil matters instead of criminal matters.

Thus far, we have allowed windfall after windfall to the banks who never had any risk of loss and who received federal bailouts, insurance, and proceeds of credit default swaps and multiple sales of the same loan — all without crediting the investors who advanced all the money that was used in the mortgage maelstrom.

The practical significance of this is simple: the money given to the banks went into a black hole and may never be seen again. The money given BACK to (restitution) investors will result in fixing at least partly the imbalance caused by the bank theft. It will also decrease the loss suffered by the lenders in the loans marked as home loans, auto loans, student loans etc. This in turn reduces the amount owed by the borrower. Their is no “reduction” of principal there is merely a “deduction” or “correction” to reflect payments received by the investors or their agents.

The practical significance of this is that money, wealth and income will be  channeled back to the those who are in the middle class or who belong there but for the trickery of the banks and the economy starts to hum a little better than before.

It all starts with abandoning the Too Big To Fail hypothesis. What policy makers are starting to realize is that the absence of prosecutions and regulatory action against these banks has produced a profound loss of confidence not only in the financial markets but in the leader of the financial markets to control itself and its own participants in finance. It’s not just fair to enforce existing laws and regulations against the banks who so flagrantly violated them and nearly destroyed all the economies of the world, it’s the only practical thing to do.

Big Banks Have a Big Problem
http://economix.blogs.nytimes.com/2013/03/14/big-banks-have-a-big-problem/

We The Taxpayers Are On The Hook For Mortgages, Student Loans, Banks
http://lonelyconservative.com/2013/03/we-the-taxpayers-are-on-the-hook-for-mortgages-student-loans-banks/

Documentary Co-Produced by Broker Exposes Foreclosure Devastation, Housing System Flaws, in Low-Income Hispanic Neighborhood of Phoenix
http://rismedia.com/2013-03-13/documentary-co-produced-by-broker-exposes-foreclosure-devastation-housing-system-flaws-in-low-income-hispanic-neighborhood-of-phoenix/

Housing advocates accuse Wells Fargo of damaging communities through foreclosures
http://www.scpr.org/blogs/economy/2013/03/13/12908/housing-advocates-accuse-well-fargo-damaging-commu/

 

Fixing the Housing Market So It’s Safe to Buy or Hold

Reality in Iceland: prosecution and letting the chips fall to the table
August 27, 2012. Neil F Garfield. Mainstream media and in particular Krugman and Ritholz have echoes what Simon Johnson and I have been saying for years. It’s not a question of theory or ideology. It’s a question of reality.
Citizens of Iceland were not in the least bit interested whether the “conservatives” or the “liberals” had compelling ideological arguments. They wanted jobs, economic stability, and decent prospects and opportunities. Citizens of Iceland were not interested in the concept of change or even change in government.
They wanted their society fixed, after being used and thrown under the bus by Wall Street using Icelandic banks as a conduit for international exchange of derivatives that turned out to be worthless. The Banks tried throwing Iceland under the bus, but Icelanders defied the power and wealth of the world’s largest banks and executed simple policies that followed the advanced thinking and analysts all over the world, past, present and future.
Bill Clinton was asked by many how he managed to take an ailing economy and turn it into a booming source of innovation with giant government surpluses. His answer was “arithmetic.” When I was a security analyst and investment banker on Wall Street the primary theme was that before investment, underwriting, or performing any act or making any decisions we had to start at the beginning — the fundamentals. Money may be hard to define but it is easy to measure.
At the end of the day if you taken more real money than you have spent, then you have more money at the end of the month. If some thief steals from you, your wealth drops. If someone claims to own your property and doesn’t own it, your wealth remains unchanged — but Wall Street, bucking the obvious proof in Iceland, says otherwise.
Wall Street says they can “borrow” the identity of homeowners and use it to create the equivalent of bank notes that can be accepted as cash equivalents as long as they dress it up with triple A ratings, and insurance companies that cannot pay for the loss and wouldn’t even if they could because the offer to buy the credit default swap, the insurance and other hedge products were based upon blatantly false premises.
Iceland simply did arithmetic and they continue to do arithmetic. They are reducing household debt, letting creditors suffer the risk of loss that was part of their contracts but now they don’t like their contracts. In Iceland too, the Banks demanded bailout money to save the financial system. But Icelanders rejected that on both legal and moral grounds.
They were not going to reward the perpetrators of fraud tooth further detriment of their victims, they would prosecute them and punish them for breaking the key laws and premises of a stable society — accountability to and for the truth.
They were not going to further burden the victims of the crimes with taxes to reward the perpetrators and their counterparts, they were going to provide as much restitution of wealth as possible and necessary to stabilize an economy that was crashing.
The financial system did not crash and burn as Wall Street had sternly predicted to the Bush and Obama administrations in the U.S. With more than 7,000 smaller banks ready and waiting pick up the pieces. They did not debase their currency and their prospects by saddling future generations with the mistakes of remote greedy bankers. They took the money that existed and disregarded the fake money, the ” cash equivalents” created all over the world allowing the shadow banning system to collapse under it’s own worthless weight. Nothing bad happened.
What did happen is that Iceland now enjoys normal economic growth, sharply declining unemployment and underemployment and does not consider trading paper whose value is based upon false transactions to be part of a their GDP. Produce real goods and services while in the U.S. And other “advanced ” superpowers they have turned themselves into paper tigers. While financial services went from 16% of U.S. GDP before this mess, it now counts for half. Arithmetic: if those shadow banking transactions are worthless then our real GDP is 34% less than what we are reporting.
In Europe where they have their heads partially in our sand, they are trying to sit on two chairs with one ass. They too understand that nothing trumps reality but the people who run government here and abroad are simply making far too much money pretending that shadow money is real money. The real value of our stock indexes is around 7500 for DJIA.
The facts are that housing is still in the dumps even if some reports show “signs of life.” to allow Foreclosures to proceed when the creditor had an undocumented c,aim without any real mortgage lien is absurd, bit it is done everyday. It isn’t a matter of defective documents, it is a matter of no documents, while the banks stole the identities of the pensions funds and homeowners for their own personal Profit,  and buried the losses until they were done trading worthless paper. THEN they gave the “ownership” of the worthless paper and the loss to the investment funds that thought they had purchased them years ago under rules that were never followed by Wall Street.
The foreclosures must end because they are illegally based upon a chain of paper without any money transactions (consideration). The “completed” Foreclosures should be disallowed because the transactions on which they were based were void for lack of consideration wherein the signature of the homeowner was procured by fraudulent premises and promises.
The real money transactions should be documented and the real loan status should be disclosed so that homeowners and investors can come to reasonable settlements and modifications without regard to the consequences to Banks whose continuing fraud is causing the U. S. And Europe without applying basic emergency procedures to stop the bleeding.
The loans are not secured by perfected liens and the principal loan origination was outright theft from investor-lenders and homeowners. But they could be secured and people could pay for the real market value of the deal they were tricked into, if we simply go back and do the arithmetic — and play fair.

Iceland Did It Right … And Everyone Else Is Doing It Wrong
http://www.ritholtz.com/blog/2012/08/iceland-did-it-right-and-everyone-else-is-doing-it-wrong/

Simon Johnson on Business Model of Lie More

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Editor’s Comment:  

Anyone who is curious why I named this blog LivingLies will have all their questions answered by this well-articulated article by Simon Johnson, Chief economist of the World Bank, author of 13 Bankers, and the main writer for www.baseline scenario.com. Johnson is first among the world of economists who instantly knew the severity of the culture of lying and deception at the TBTF banks. He is joined in these views by the Financial Times, normally rabidly pro-bank and no less than the Governor of the Bank of England who apparently coined the phrase “Lie More” to replace what was the only index that mattered in the world of finance and bond trading.

The consequences of this culture of lying will be laid bare in the weeks and months and years to come. But as Johnson points out, the days are over when anyone trusts a bank or bank statement. Representations of bank officials once considered as good as gold or what used to be called good as Libor, are now going to be subject of scrutiny and will no doubt reveal a pattern of deceit even deeper than thes we already know about the mortgage meltdown and the trading scam resulting from intentionally manipulating Libor — the gold standard of all indexes.

Lie-More As A Business Model

By Simon Johnson

On Monday, Bob Diamond – the CEO of Barclays, one of the largest banks in the world – was supposedly the indispensable man, with his supporters claiming he was the only person who could see that global megabank through a growing scandal.  On Tuesday morning Mr. Diamond resigned and the stock market barely blinked – in fact, Barclays’ stock was up 0.3 percent.  As Charles de Gaulle supposedly remarked, “the cemeteries are full of indispensable men.”

Mr. Diamond’s fall was spectacular and complete.  It was also entirely appropriate.

Dennis Kelleher of Better Markets – a financial reform advocacy group – summarized the situation nicely in an interview with the BBC World Service on Tuesday.  The controversy that brought down Mr. Diamond had to do with deliberate and now acknowledged deception by Barclays’ staff with regard to the data they reported for Libor – the London Interbank Offered Rate (with the abbreviation pronounced Lie-Bore).  Mr. Kelleher was blunt: the issue in question is “Lie More” not Libor.  (See also this post on his blog, making the point that this impacts credit transactions with a face value of at least $800 trillion.)

Mr. Kelleher’s words may seem harsh, but they are exactly in line with the recently articulated editorial position of the Financial Times (FT) – not a publication that is generally hostile to the banking sector.  In a scathing editorial last weekend (“Shaming the banks into better ways,” June 28th), the typically nuanced FT editorial writers blasted behavior at Barclays and nailed the broader issue in what it called “a long-running confidence trick”:

“The Barclays affair may lack the spice of some recent banking scandals, involving as it does the rather dry “crime” of misreporting interest rates.  But few have shone such an unsparing light on the rotten heart of the financial system.”

The editorial was exactly right with regard to the cultural problem – within that Barclays it had become acceptable or perhaps even encouraged to provide false information.  It underemphasized, however, the importance of incentives in creating that culture.  The employees of Barclays were doing what they were paid to do – and the latest indications from the company are that none of their bonuses will now be “clawed back”.

Martin Wolf, senior economics columnist at the FT and formerly a member of the UK’s Independent Banking Commission, sees to the core issue:

“banks, as presently constituted and managed, cannot be trusted to perform any publicly important function, against the perceived interests of their staff. Today’s banks represent the incarnation of profit-seeking behaviour taken to its logical limits, in which the only question asked by senior staff is not what is their duty or their responsibility, but what can they get away with.”

This matters because, “Trust is not an optional extra in banking, it is, as the salience of the word “credit” to this industry implies, of the essence.”

As the FT editorial put it, “The bankers involved have betrayed an important public trust – that of keeping an accurate public record of the key market rates that are used to value contracts worth trillions of dollars”.

In the words of Mervyn King, governor of the Bank of England, “the idea that my word is my Libor is dead.”  Translation: No one will believe large banks again when their executives claim they could have borrowed at a particular interest rate – we will need to see actual transaction data, i.e., what they actually paid.  Presumably there should be similar skepticism about other claims made by global megabanks, including whenever they plead that this or that financial reform – limiting their ability to take excessive risk and impose inordinate costs on society – will bring the economy to its knees.  It is all special pleading of one or another, mostly intended to rip off customers or taxpayers or, ideally perhaps, both.

Mr. Kelleher has the economics exactly right.  Global megabanks have an incentive to deceive customers, including both individuals and nonfinancial corporations.  Their size confers both market power and the political power needed to conceal the extent to which they are engage in economic fraud.  The lack of transparency in derivatives markets provides them with an opportunity to cheat, but the abuses are much wider – as the Libor scandal demonstrates.

The rip-off is not just for retail investors; chief financial officers of major corporations who should be up in arms.  Boards of directors and shareholders of companies that buy services from big banks should be asking much harder questions about all kinds of derivatives transactions – and who exactly is served by the terms of such agreements.

As Mr. Kelleher puts it on his blog,

“They like to call themselves “banks,” but they aren’t banks in any traditional sense. They are global behemoths that are not just too-big-to-fail, but also too-big-to-regulate and too-big-to-manage. Take JP Morgan Chase for example. It has a $2.35 trillion balance sheet, more than 270,000 employees worldwide, thousands of legal entities, 554 subsidiaries and, as proved by the recent trading losses in London, a CEO, CFO and management team that has no idea what is going on in their own bank.”

“Let’s hope for the sake of the global financial system, the global economy and taxpayers worldwide that Mr. Diamond’s resignation is the first of many. What is needed is a clean sweep of the executive offices of these too-big-to-fail banks, which are still being governed by the same business model as before the crisis: do whatever they can get away with to get the biggest paychecks as possible. (Remember, CEO Diamond paid himself 20 million pounds last year and was the UK banking leader insisting that everyone stop picking on the banks.)

Lie-more is just the latest example of why that all has to change and the sooner the better”


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Editor’s Comment:

The good news is that the myth of Jamie Dimon’s infallaibility is at least called into question. Perhaps better news is that, as pointed out by Simon Johnson’s article below, the mega banks are not only Too Big to Fail, they are Too Big to Manage, which leads to the question, of why it has taken this long for Congress and the Obama administration to conclude that these Banks are Too Big to Regulate. So the answer, now introduced by Senator Brown, is to make the banks smaller and  put caps on them as to what they can and cannot do with their risk management.

But the real question that will come to fore is whether lawmakers in Dimon’s pocket will start feeling a bit squeamish about doing whatever Dimon asks. He is now becoming a political and financial liability. The $2.3 billion loss (and still counting) that has been reported seems to be traced to the improper trading in credit default swaps, an old enemy of ours from the mortgage battle that continues to rage throughout the land.  The problem is that the JPM people came to believe in their own myth which is sometimes referred to as sucking on your own exhaust. They obviously felt that their “risk management” was impregnable because in the end Jamie would save the day.

This time, Jamie can’t turn to investors to dump the loss on, thus drying up liquidity all over the world. This time he can’t go to government for a bailout, and this time the traction to bring the mega banks under control is getting larger. The last vote received only 33 votes from the Senate floor, indicating that Dimon and the wall Street lobby had control of 2/3 of the senate. So let ius bask in the possibility that this is the the beginning of the end for the mega banks, whose balance sheets, business practices and public announcements have all been based upon lies and half truths.

This time the regulators are being forced by public opinion to actually peak under the hood and see what is going on there. And what they will find is that the assets booked on the balance sheet of Dimon’s monolith are largely fictitious. This time the regulators must look at what assets were presented to the Federal Reserve window in exchange for interest free loans. The narrative is shifting from the “free house” myth to the reality of free money. And that will lead to the question of who is the creditor in each of the transactions in which a mortgage loan is said to exist.

Those mortgage loans are thought to exist because of a number of incorrect presumptions. One of them is that the obligation remains unpaid and is secured. Neither is true. Some loans might still have a balance due but even they have had their balances reduced by the receipt of insurance proceeds and the payoff from credit default swaps and other credit enhancements, not to speak of the taxpayer bailout.

This money was diverted from investor lenders who were entitled to that money because their contracts and the representations inducing them to purchase bogus mortgage bonds, stated that the investment was investment grade (Triple A) and because they thought they were insured several times over. It is true that the insurance was several layers thick and it is equally true that the insurance payoff covered most if not all the balances of all the mortgages that were funded between 1996 and the present. The investor lenders should have received at least enough of that money to make them whole — i.e., all principal and interest as promissed.

Instead the Banks did the unthinkable and that is what is about to come to light. They kept the money for themselves and then claimed the loss of investors on the toxic loans and tranches that were created in pools of money and mortgages — pools that in fact never came into existence, leaving the investors with a loose partnership with other investors, no manager, and no accounting. Every creditor is entitled to payment in full — ONCE, not multiple times unless they have separate contracts (bets) with parties other than the borrower. In this case, with the money received by the investment banks diverted from the investors, the creditors thought they had a loss when in fact they had a claim against deep pocket mega banks to receive their share of the proceeds of insurance, CDS payoffs and taxpayer bailouts.

What the banks were banking on was the stupidity of government regulators and the stupidity of the American public. But it wasn’t stupidity. it was ignorance of the intentional flipping of mortgage lending onto its head, resulting in loan portfolios whose main characteristic was that they would fail. And fail they did because the investment banks “declared” through the Master servicer that they had failed regardless of whether people were making payments on their mortgage loans or not. But the only parties with an actual receivable wherein they were expecting to be paid in real money were the investor lenders.

Had the investor lenders received the money that was taken by their agents, they would have been required to reduce the balances due from borrowers. Any other position would negate their claim to status as a REMIC. But the banks and servicers take the position that there exists an entitlement to get paid in full on the loan AND to take the house because the payment didn’t come from the borrower.

This reduction in the balance owed from borrowers would in and of itself have resulted in the equivalent of “principal reduction” which in many cases was to zero and quite possibly resulting in a claim against the participants in the securitization chain for all of the ill-gotten gains. remember that the Truth In Lending Law states unequivocally that the undisclosed profits and compensation of ANYONE involved in the origination of the loan must be paid, with interest to the borrower. Crazy you say? Is it any crazier than the banks getting $15 million for a $300,000 loan. Somebody needs to win here and I see no reason why it should be the megabanks who created, incited, encouraged and covered up outright fraud on investor lenders and homeowner borrowers.

Making Banks Small Enough And Simple Enough To Fail

By Simon Johnson

Almost exactly two years ago, at the height of the Senate debate on financial reform, a serious attempt was made to impose a binding size constraint on our largest banks. That effort – sometimes referred to as the Brown-Kaufman amendment – received the support of 33 senators and failed on the floor of the Senate. (Here is some of my Economix coverage from the time.)

On Wednesday, Senator Sherrod Brown, Democrat of Ohio, introduced the Safe, Accountable, Fair and Efficient Banking Act, or SAFE, which would force the largest four banks in the country to shrink. (Details of this proposal, similar in name to the original Brown-Kaufman plan, are in this briefing memo for a Senate banking subcommittee hearing on Wednesday, available through Politico; see also these press release materials).

His proposal, while not likely to immediately become law, is garnering support from across the political spectrum – and more support than essentially the same ideas received two years ago.  This week’s debacle at JP Morgan only strengthens the case for this kind of legislative action in the near future.

The proposition is simple: Too-big-to-fail banks should be made smaller, and preferably small enough to fail without causing global panic. This idea had been gathering momentum since the fall of 2008 and, while the Brown-Kaufman amendment originated on the Democratic side, support was beginning to appear across the aisle. But big banks and the Treasury Department both opposed it, parliamentary maneuvers ensured there was little real debate. (For a compelling account of how the financial lobby works, both in general and in this instance, look for an upcoming book by Jeff Connaughton, former chief of staff to former Senator Ted Kaufman of Delaware.)

The issue has not gone away. And while the financial sector has pushed back with some success against various components of the Dodd-Frank reform legislation, the idea of breaking up very large banks has gained momentum.

In particular, informed sentiment has shifted against continuing to allow very large banks to operate in their current highly leveraged form, with a great deal of debt and very little equity.  There is increasing recognition of the massive and unfair costs that these structures impose on the rest of the economy.  The implicit subsidies provided to “too big to fail” companies allow them to boost compensation over the cycle by hundreds of millions of dollars.  But the costs imposed on the rest of us are in the trillions of dollars.  This is a monstrously unfair and inefficient system – and sensible public figures are increasingly pointing this out (including Jamie Dimon, however inadvertently).

American Banker, a leading trade publication, recently posted a slide show, “Who Wants to Break Up the Big Banks?” Its gallery included people from across the political spectrum, with a great deal of financial sector and public policy experience, along with quotations that appear to support either Senator Brown’s approach or a similar shift in philosophy with regard to big banks in the United States. (The slide show is available only to subscribers.)

According to American Banker, we now have in the “break up the banks” corner (in order of appearance in that feature): Richard Fisher, president of the Federal Reserve Bank of Dallas; Sheila Bair, former chairman of the Federal Deposit Insurance Corporation; Tom Hoenig, a board member of the Federal Deposit Insurance Corporation and former president of the Federal Reserve Bank of Kansas City; Jon Huntsman, former Republican presidential candidate and former governor of Utah; Senator Brown; Mervyn King, governor of the Bank of England; Senator Bernie Sanders of Vermont; and Camden Fine, president of the Independent Community Bankers of America. (I am also on the American Banker list).

Anat Admati of Stanford and her colleagues have led the push for much higher capital requirements – emphasizing the particular dangers around allowing our largest banks to operate in their current highly leveraged fashion. This position has also been gaining support in the policy and media mainstream, most recently in the form of a powerful Bloomberg View editorial.

(You can follow her work and related discussion on this Web site; on twitter she is @anatadmati.)

Senator Brown’s legislation reflects also the idea that banks should fund themselves more with equity and less with debt. Professor Admati and I submitted a letter of support, together with 11 colleagues whose expertise spans almost all dimensions of how the financial sector really operates.

We particularly stress the appeal of having a binding “leverage ratio” for the largest banks. This would require them to have at least 10 percent equity relative to their total assets, using a simple measure of assets not adjusted for any of the complicated “risk weights” that banks can game.

We also agree with the SAFE Banking Act that to limit the risk and potential cost to taxpayers, caps on the size of an individual bank’s liabilities relative to the economy can also serve a useful role (and the same kind of rule should apply to non-bank financial institutions).

Under the proposed law, no bank-holding company could have more than $1.3 trillion in total liabilities (i.e., that would be the maximum size). This would affect our largest banks, which are $2 trillion or more in total size, but in no way undermine their global competitiveness. This is a moderate and entirely reasonable proposal.

No one is suggesting that making JPMorgan Chase, Bank of America, Citigroup and Wells Fargo smaller would be sufficient to ensure financial stability.

But this idea continues to gain traction, as a measure complementary to further strengthening and simplifying capital requirements and generally in support of other efforts to make it easier to handle the failure of financial institutions.

Watch for the SAFE Banking Act to gain further support over time.

FASCISM REVISITED: WHAT ARE WE AFRAID OF?

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BREAK UP BANK OLIGOPOLY

EDITOR’S COMMENT:  Amongst many other respected and experienced economists, Simon Johnson has been vocal in his basic premise: The bank oligopoly must be destroyed if we are to see any real possibility of recovery that will positively impact the average citizen. Destroying the oligopoly simply means breaking up the banks that are so large that they have developed a myth: there are too many people in government and  in the streets who think that breaking up these banks will destroy America. In a word, they are scared. And as long as the banks control that narrative, the situation will remain the same.

Then there are those who, fearing the exercise of too much government power, say that there must be another way. We can’t just willy-nilly break up private companies because we don’t like their success or power. That also comes from the banks controlling the narrative. Look at where their reported “profits” came from: (1) marking down their own debt to market value because the market has decided that their chances of surviving are diminishing and (2) sale of assets. They are not really making money.

They are playing accounting tricks. Take away the tricks and they are broke. They are holding “assets” on their books that never were owned by them, were never paid for, and frankly don’t exist. They are getting a pass from government regulators because those who control the levers of power are too afraid of what might happen. Any other bank would, as hundreds have already been, “resolved” — i.e., broken up and sold to one or more parties who know how to practice banking. So breaking them up is simply execution of a long-standing policy of taking insolvent banks and transferring the assets to banks that are solvent.

They use core banking services at teaser or no cost to attract customers and then bang them over the head with over-priced add-ons that people don’t even need. I remember when Banks were profitable by taking in deposits and making loans, if they were any good at it. In fact, there are 7,000 smaller institutions that do exactly that, and which all have access to the same electronic backbone for funds transfer and other services that are widely believed to be the exclusive province of the big Banks.

A change in the internal rules of the networks, which are no more than utilities for electronic funds transfer, and ALL banks would be able to offer the same services without a dollar more in capital — at a fraction of the cost of banking with the big banks, whose hidden charges are pushing the cost of maintaining a bank account toward $400 per year.

Lately there have been numerous clashes in rhetoric as to whether the Tea Party and the Occupyers speak with the same voice on the same topic. Since both are composed of numerous factions and groups with their own agendas, it seems unlikely that there would be uniformity of opinion. But both seem to be in agreement about financial policy and control. The distinction being made by Tea Party advocates is that they speak against the government whereas the Occupyers are speaking against the Banks. I’ll ignore the slurs that come from heated argument.

The key word absent from the rhetoric is “oligopoly” probably because few people understand what it means. An oligopoly is a group of special interests that control the marketplace to an extent that free market forces are barred from operating. Oligopolies control government. That is what we have. The Banks and some other large corporations are controlling the marketplace — and with it, the government.

So the so-called difference between being against the government or being against the banks’ control of government is actually creating unnecessary confusion. In many ways, the Banks ARE the government. They have more to say about the accounting rules, regulatory rules and laws than anyone else and they own lobbyists — something that regular people don’t have in Washington and State Capitals.

I’m not opposed to banking, investment banking, commercial banking or any other kind of finance that lies at the foundation of our capitalist system. I am opposed to those who have gamed the system such that the system doesn’t work the way it was meant to operate. We have a few Banks and a few individuals with out-sized power to control all three branches of government. It is a form of fascism, which is no better than communism. I think the Tea Party advocates and the Occupyers would agree that what they all seek is a return to capitalism from fascism, and a return of freedoms for individuals that have been whittled away by the greed and ambition of an extremely small number of individuals at great cost to all of us.

Take for example the foreclosure mess. Reverse the players. Now tell me that you think it is a good idea for borrowers to be able to send in shills to sign the documents so that they could later say that some other borrower was the real borrower and that they themselves never owed the money. Take it a step further. Tell me that it is a good idea, for the borrowers, knowing that they were actually not in the loop, were going to accept borrowed money on the same loan several times over and that when the loan failed, they would all fail, which was good because the borrower, controlling the payments, had placed bets all over Wall Street that the loans would fail. So by borrowing $200,000, for example, the Borrower would be making several times that and never pay back the money. Still think we are talking technicality?

Most people would agree that the Borrower in that transaction was no Borrower and the Lender, may have thought it was in a loan transaction but in reality it was investing into a Ponzi scheme. The Borrower who appeared on the documents was a con man with no intent to pay back the loan and was taking orders from the real people who were in charge of organized financial crimes. To treat such a Borrower as though they had the rights and protections of conventional borrowers would be absurd, most would agree.

So most people would agree that the Borrower in our example had to give back all the money and by the way, go to jail for 30 years, if the crime was big enough. This crime is big enough. And any attempt at stonewalling requests or demands from litigant innocent Lenders who were seeking to recover as much of their money as possible would be met with fierce orders from the bench commanding compliance or risk jail.

[You can use the same example with student loans: there the shills (pretender lenders) get a government guarantee and a promise that the debt can’t be discharged in bankruptcy. But the lender was a shill (straw-man) and the organizers already made their election on how to deal with risk — they wouldn’t take any. All the risk was shifted to investors in “securitization” which never was perfected. So the guarantee doesn’t apply to them and neither does the exemption from discharge in bankruptcy.]

That foreclosure example, one of many, is no fairy tail. The example above is exactly what the titans of Wall Street did to investors. Now if you don’t think it is fair that Wall Street should be able to do that, then you shouldn’t think that the Borrower in our example should be able to do it either.

But then you would be saying that the use of shills at the lending table is a bad thing. Same for denying responsibility (bankruptcy remote vehicles) for deceptive and fraudulent lending. And the same for tricking the other party into thinking it was one kind of transaction when in fact it was another. Same for going to court posing as one party when in fact you are using the layer of attorneys, substitute trustees, and foreclosure companies to protect yourself against charges of fraud when it is discovered that you were simply dipping at the trough again, not collecting on a debt.

Banks get away with it because they have the word “bank” in their name. Occupyers and Tea Party advocates would agree, I hope, that is a bad thing and that it should be corrected without delay.

TOO BIG TO FAIL IS TOO BIG

By Simon Johnson

The idea that big banks damage the broader economy has considerable resonance on the intellectual right.  Tom Hoenig, recently retired president of the Kansas City Fed, has been our clearest official voice on this topic.  And Gene Fama, father of the efficient markets view of finance, said on CNBC last year, that having banks that are too big to fail is “perverting activities and incentives” in financial markets – giving big financial firms, “a license to increase risk; where the taxpayers will bear the downside and firms will bear the upside.”

The mainstream political right, however, has been reluctant to take on the issue. This changed on Wednesday, with a very clear statement by Jon Huntsman in the Wall Street Journal on regulatory capture and its consequences.  Before the 2008 financial crisis: “The largest banks were pushing hard to take more risk at taxpayers’ expense.”  And now,

“More than three years after the crisis and the accompanying bailouts, the six largest American financial institutions are significantly bigger than they were before the crisis, having been encouraged to snap up Bear Stearns and other competitors at bargain prices. These banks now have assets worth over 66% of gross domestic product—at least $9.4 trillion, up from 20% of GDP in the 1990s. There is no evidence that institutions of this size add sufficient value to offset the systemic risk they pose.”

This message could work politically, for five reasons. Read the rest of this entry »

SIMON JOHNSON: OCC SELLS OUT TO BANKS: CONSUMERS DON’T COUNT

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CONSUMERS DON’T COUNT

EDITOR’S COMMENT: Fascism is a system in which the government is essentially run by business. The premise of fascism is that successful commerce (as measured by the government that is controlled by business) leads to a successful society. Italy tried it and we know what happened there. Like anywhere else,  including the United States, without the government being the referee in the marketplace, it is only BIG BUSINESS that succeeds — leaving small business, entrepreneurs, innovation, and consumers to eat dirt.

When regulators know their next job, and their future prospects will come from the banks they are regulating they essentially submit themselves to the control of their future employers. That is what has happened in banking. That is what has happened with our government. And that is why the elephant in the living room is being ignored.

The current PLAYBOOK of the banks, duly followed by most regulators and virtually all members of congress and virtually all legislatures around the country (except Hawaii?), is looking for a way out of the mortgage mess by having regulators intervene in what is essentially state law and what has clearly been gross negligence at best, and malfeasance or criminal activity on the part of the banks at worst. The victims are clearly identified — investors who bought the falsely valued mortgage bonds that were nothing like what was described and homeowners who bought the falsely valued loan products based upon falsely valued real estate in deals that were nothing like what was described.

In short, the Banks wish to use their unbridled control over government and in particular the regulators, to redefine banking, risk law and morality so that they can escape the criminal prosecution that followed the savings and loan scandal of the 1908’s where over 800 bankers went to jail. (yes that’s right, as a class, they have a prior criminal record, so this time their punishment should be worse).

While the main action is in court where the banks are losing ground every day just by looking at the truth, the facts, the evidence and the results of their mean-spirited creation of the illusion of securitization, citizens (consumers, past and present) must be ever vigilant and raise hell when they are doing something that is plainly bad for the country and bad for our children and grandchildren. Let your representatives and the regulators know in writing that you don’t approve of the job they are doing regulating the banks or in the handling of the foreclosure crisis which now looks like it will persist for decades.

The goal is NOT to preserve the health of the banks at all costs. The goal, as clearly set forth in our constitution and in case law going back centuries, is to protect and serve the members of the society that have agreed to a form of governing themselves. If that goal changes, then government is spurious. Government becomes our jailers instead of our protectors and if they won’t protect us against financial terrorism and we let them, what is to prevent them from deciding that it is “best for the country” (meaning themselves) to cease protecting us from anything else, including military threat.

May 19, 2011, 5:00 am

When Regulators Side With the Industries They Regulate

By SIMON JOHNSON
Today's Economist

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

The Office of the Comptroller of the Currency is one the most important bank regulators in the United States — an independent agency within the Treasury Department that is responsible for “national banks” (for more on who regulates what in the United States, see this primer).

Over the last decade, the Office of the Comptroller of the Currency repeatedly demonstrated that it was very much on the side of banks, for example with regard to fending off attempts to impose more consumer protection. (James Kwak and I covered this in “13 Bankers,” and those details have not been disputed by the agency or anyone taking its side.)

After suffering some serious and well-deserved loss of prestige during the financial crisis of 2007-9, the comptroller’s office survived the Dodd-Frank reform legislation and is now back to pushing the same agenda as before. In its view and that of its senior staff — including key people who remain from before the crisis — the “safety and soundness” of banks requires, above all, not a lot of protection for consumers.

This is a mistaken, anachronistic and dangerous belief.

Probably the most egregious mistake made by the Office of the Comptroller of the Currency during the subprime boom was to push back against state officials who wanted to curtail malpractice in housing loans, including predatory lending.

The comptroller’s office ultimately lost that case before the Supreme Court, but its delaying action meant that an important potential brake on abuse and excess was not available — which contributed to the worst business practices that took hold in 2006 and 2007 (see this nice summary or Eliot Spitzer’s account).

Naturally, post-debacle the Office of the Comptroller of the Currency talks an ostensibly better game but, as Joe Nocera put it, “it sure looks as though the country’s top bank regulator is back to its old tricks.” In discussions regarding a potential settlement on mortgage foreclosures — and how they have been handled — the comptroller’s office has supported an outcome that is more favorable to the banks (see the Nocera column for more details).

Now it is again insisting that federal regulation pre-empts the ability of states to regulate in a way that would protect consumers.

In a letter on May 12 to Senator Thomas Carper, Democrat of Delaware, the agency asserted that its pre-emption regulations are consistent with the Dodd-Frank Act (see this interpretation by Sidley Austin, a law firm, which I draw on). There is a lot of legalese in the letter but the basic issue is simple — are states allowed to protect their consumers vis-à-vis national banks, or do they have to rely on the Office of the Comptroller of the Currency, despite its weak track record?

The comptroller’s office is clear — the states are pre-empted, meaning that national comptroller regulations will always overrule them on the issues that matter. (As a technical matter, the issue comes down to what is known as visitation: whether state-level authorities can gain access to bank documents if the bank or the comptroller’s office has not already determined that there is a problem.)

The American Bankers Association was, not surprisingly, delighted: “The O.C.C.’s action helps clarify the rules of the road for national banks and how they serve their customers.”

Richard K. Davis
, chief executive of U.S. Bancorp and then chairman of the Financial Services Roundtable, a powerful lobbying group, emphasized the importance of the pre-emption issue to national banks in March 2010, during the Dodd-Frank financial reform debate in the Senate: “If we had one thing to fight for, it would be to protect pre-emption.”

It is hard to know which would seem more incredible to a second grader: that we left in place the same agency that was responsible for a significant part of past misbehavior, or that this agency seems determined to continue with the same philosophy and policies.

The problem is not that the Office of the Comptroller of the Currency sees its primary duty as the “safety and soundness” of the financial system. Rather, the danger to the public arises because it has consistently taken the view that the best way to protect banks — and keep them out of financial trouble — is to allow them to be harsh with consumers.

This is worse than short-sighted — it completely ignores all externalities, such as how business practices and ethics evolve, and it pays no attention to even the most basic macroeconomic dynamics, such as the fact that we have a credit cycle during which we should expect lenders to “race to the bottom” in terms of standards.

The Office of the Comptroller of the Currency should have been abolished by Dodd-Frank. Unfortunately, it is too late for Congress to revisit this issue. President Obama should at the very least nominate a new head of the Office of the Comptroller of the Currency — the job has been open since August of last year — and a serious reformer could make a great deal of difference.

Under its current leadership and with its current approach, the Office of the Comptroller of the Currency is putting our financial system into harm’s way. The lessons of 2007-9 have been completely lost on it. As Talleyrand said of the Bourbons, “They have learned nothing and forgotten nothing.”

Simon JOhnson: Regulation is a Myth

EDITOR’S NOTE: Johnson is a leading economist who has been a consistent critic of anyone who fails to face reality. Applying his knowledge as an economist form the International Monetary Fund, his point is that we have a bank oligopoly in control of our society and that the TBTF banks are running the show. I agree

March 31, 2011, 5:00 am

The Myth of Resolution Authority

By SIMON JOHNSON
Today's Economist

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

Senator Ted Kaufman, Democrat of Delaware, has been highly skeptical about whether the federal government's power to shut banks can be applied to global megabanks unless an international accord is reached.Andrew Harrer/Bloomberg News Senator Ted Kaufman, Democrat of Delaware, has been highly skeptical about whether the federal government’s power to shut banks can be applied to global megabanks, unless an international accord is reached.

Back when it really mattered – last spring, during the debate over the Dodd-Frank financial regulation – Senator Ted Kaufman, Democrat of Delaware, emphasized repeatedly on the Senate floor that the proposed “resolution authority” (the power to shut banks) was an illusion.

His point was that extending the established Federal Deposit Insurance Corporation powers for “resolving” financial institutions to include global megabanks simply could not work.

At the time, Senator Kaufman’s objections were dismissed by “experts” from both the official sector and the private sector. Now these same people (or their close colleagues) are falling over themselves to argue that resolution cannot work for the country’s giant bank holding companies. The implication, which these officials and bankers still cannot grasp, is that we need much higher capital requirements for systemically important financial institutions.

Writing in the March 29 edition of National Journal, Michael Hirsh quotes a “senior Federal Reserve Board regulator” as saying: “Citibank is a $1.8 trillion company, in 171 countries with 550 clearance and settlement systems,” and “We think we’re going to effectively resolve that using Dodd-Frank? Good luck!”

The regulator’s point is correct. The F.D.I.C. can close small and medium-size banks in an orderly manner, protecting depositors while imposing losses on shareholders and even senior creditors. But to imagine that it can do the same for a very big bank strains credulity.

And to argue that such a resolution authority can work for any bank with significant cross-border operations is simply at odds with the legal facts. The resolution authority granted under Dodd-Frank is purely domestic; that is, it applies only within the United States.

Congress cannot readily make laws that apply in other countries. A cross-border resolution authority would require either agreement among the various governments involved or some sort of synchronization for the relevant parts of commercial bankruptcy codes and procedures.

There are no indications that such arrangements will be made, or that serious intergovernmental efforts are under way to create any kind of cross-border resolution authority — for example, within the Group of 20.

For more than a decade, the International Monetary Fund has been advising that the euro zone adopt some sort of cross-border resolution mechanism. But European (and other) governments do not want to take this kind of step.

Rightly or wrongly, they do not want to credibly commit to how they would handle large-scale financial failure –- preferring instead to rely on various kinds of ad hoc and spontaneous measures.

I have checked these facts directly and recently with top Wall Street lawyers, with leading thinkers from left and right on financial issues (in the United States, Europe and elsewhere), and with responsible officials from the United States and other countries. That Senator Kaufman was correct is now affirmed on all sides.

Even leading figures within the financial sector now acknowledge this. Mr. Hirsch quotes E. Gerald Corrigan, former president of the Federal Reserve Bank of New York and an executive at Goldman Sachs since the 1990s: “In my judgment, as best as I can recount history, not just the last three years but the history of mankind, I can’t think of a single case where we were able execute the orderly wind-down of a systemically important institution – especially one with an international footprint.”

It is most unfortunate that Mr. Corrigan did not make that point last year – for example, when he (and I) testified before the Senate Banking Committee on the Volcker Rule in February 2010.

In fact, rather tragically in retrospect, Mr. Corrigan was among those arguing most articulately that some form of Enhanced Resolution Authority (as he called it) could actually handle the failure of large integrated financial groups (again, his terminology).

The “resolution authority” approach to dealing with very big banks has, in effect, failed before it even started.

And standard commercial bankruptcy for global megabanks is not an appealing option -– as argued by Anat Admati in The New York Times’ Room for Debate in January.

The only people I have met who are pleased with the Lehman bankruptcy are bankruptcy lawyers. Originally estimated at more than $900 million, bankruptcy fees for Lehman Brothers are now forecast to top $2 billion. (The AmLaw Daily describes this in detail.)

It’s too late to reopen the Dodd-Frank debate –- and a global resolution authority is a chimera in any case. But it’s not too late to affect policies still under development. The lack of a meaningful resolution authority further strengthens the logic of larger capital requirements, as these would provide stronger buffers against bank insolvency.

The Federal Reserve has yet to announce the percentage of equity financing – i.e., capital – that will be required for systemically important financial institutions (the so-called S.I.F.I.’s). Under Basel III, national regulators set an additional S.I.F.I. capital buffer. The Swiss National Bank is requiring 19 percent capital and the Bank of England is moving in the same direction.

Yet there are clear signs that the Fed’s thinking –- both at the policy level and at the technical level –- is falling behind this curve.

This time around, officials should listen to Senator Kaufman. In his capacity this year as chairman of the Congressional Oversight Panel for the Troubled Assets Relief Program (for example, in this hearing), he has been arguing consistently and forcefully for higher capital requirements.

REPUBLICANS GO AFTER ELIZABETH WARREN

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EDITOR’S NOTE: In keeping with the full court press by the mega banks, legislators are following their orders taking aim at anything that could unravel the credit mess, title mess, foreclosure mess and economic crisis in this country. Wall Street is running the show. Maybe somewhere along the line the outrage will grow and there will be a strong backlash against the people of both parties who are following orders.

To make things clear, all Warren wants is transparency and no tricks played against consumers of banking and financial services. That’s it. And that is what Wall Street is opposed to because the more we find out the closer they come to jail time. Once again Wall Street is working hard to take the referees off the playing field so they can bully their way around to steal everyone’s lunch.

Who’s Afraid of Elizabeth Warren?

By SIMON JOHNSON
Today's Economist

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

The next big political battle in Washington -– whenever the budget debate is declared over –- is likely to feature the Consumer Financial Protection Bureau and whether Elizabeth Warren will become its first official head.

Elizabeth Warren, head of Consumer Financial Protection Bureau, told a House subcommittee on Wednesday, Harry Hamburg/Associated Press Elizabeth Warren, head of Consumer Financial Protection Bureau, told a House subcommittee on Wednesday, “We do not envision new rules as the main focus of how the C.F.P.B. can best protect consumers.”

But will this fight feature a classic left vs. right set-piece confirmation showdown in the Senate? Or it will it be resolved with cloaks and daggers closer to the White House – with Treasury Secretary Timothy F. Geithner working to prevent Professor Warren’s nomination, or her confirmation if she were nominated?

Ms. Warren was put in charge of establishing the agency by President Obama, but the Treasury retains the powers of the bureau until a permanent director is nominated and confirmed by the Senate — at which point the agency will fall under the authority of the Federal Reserve Board, while operating with a high degree of independence. The president has not yet nominated Ms. Warren to the post nor indicated if he will.

There is much to commend the left vs. right scenario. The Republicans, after all, want to argue that regulation is excessive in general and regulation of financial products is somewhere between unnecessary and dangerous for economic growth in particular.

This theme came up at times during the Dodd-Frank legislative debate on financial regulation last year, but it was largely lost in the larger and more confused conversation.

Now Representative Spencer Bachus, Republican of Alabama, the chairman of the House Financial Services Committee, has Ms. Warren firmly in his sights – with the mortgage settlement negotiations as the flashpoint.

In a recent letter to Secretary Geithner, Mr. Bachus said: “Reports about the role played by political appointees in the Treasury department — including those affiliated” with the Consumer Financial Protection Bureau, “an agency that does not yet have any regulatory or enforcement authority — raise further questions.”

No matter that the Consumer Financial Protection Bureau became involved only when the state attorneys general asked for advice. Mr. Bachus is taking the opportunity to follow up on what he said recently: “In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.”

The industry is unhappy because the proposed settlement — or, you could say, its transgressions with regard to foreclosures — could cost them up to $20 billion.

Mr. Bachus would not have a direct voice in any nomination hearing, which is the purview of the Senate, but plenty of Republican senators share his views, including Richard C. Shelby of Alabama, the ranking minority member of the Senate Banking Committee. And The Wall Street Journal regularly joins in the chorus opposing Ms. Warren’s views.

Ms. Warren actually represents a much more nuanced view -– arguing that transparency and simplicity, from the perspective of customers, creates a more level playing field and is good for the industry.

Some community bankers seem to be on her side. She is also good at explaining this view, and a confirmation hearing would be the perfect place for the country to witness and hopefully participate in this discussion. (Read her recent speech to the Credit Union National Association or her testimony Wednesday to a House Financial Services subcommittee and make up your own mind.)

As Senator Sherrod Brown, Democrat of Ohio and a member of the Senate Banking Committee, pointedly framed the issues for the foreclosure debacle: “No person or company is above the law. And that’s good for capitalism, it’s not antibusiness, and it’s not a minor inconvenience that can be ignored in pursuit of bigger profits.”

But before you set aside time in the early summer for potentially gripping television from Capitol Hill, Ms. Warren has to get past Secretary Geithner.

During the Dodd-Frank debate, Mr. Geithner frequently asserted that “capital, capital, capital” was all we really needed to fix the financial system. Yet his team agreed to the Basel III agreement, which sets a lower bar for equity financing than Lehman Brothers had on the day before it failed. There is no sign that systemically important financial institutions will be required to have a significant extra capital buffer though this has supposedly not yet been decided.

And despite the undecided capital standards and large evident problems still facing banks (the foreclosure fiasco, commercial real estate woes, continuing high unemployment), the Financial Stability Oversight Council — which Mr. Geithner heads — is about to sign off on letting banks increase their dividends.

This makes no sense at all in terms of economic policy. Yet that is Mr. Geithner’s position. (If anyone you know at Treasury thinks this assessment is unfair, I have laid out this case in recent posts.)

And having Ms. Warren on the scene — providing an alternative, pro-consumer perspective — may not be to his liking.

President Obama missed his best opportunity to reform the financial system when advisers — including Mr. Geithner – recommended in March 2009 that he defer to top bankers, as James Kwak and I noted in “13 Bankers.”

His team further punted when they failed to push for real change in the spring and summer of 2010, while the financial-sector legislation was before the Senate.

Mr. Geithner and his people were instrumental in defeating the Brown-Kaufman amendment, which would have limited the size and the leverage (debt relative to equity) of the largest banks in the United States.

Will Mr. Geithner side with the Republicans in blocking Ms. Warren’s appointment? Will he now help prevent Ms. Warren, potentially the most effective modern regulator, from coming up for a vote in the Senate? That remains to be seen.

 

BOA SAYS NO TO CORRECTION OF PRINCIPAL: “UNFAIR AND UNEXPLAINABLE”

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SEE modification-plan-sought-follow-the-money-not-the-paperwork

EDITOR’S NOTE: Moynihan is pulling out the old argument, trying to stir up people who have been paying their mortgage so he and the other mega banks won’t be required to cough up trillions of dollars they stole through fraudulent appraisals of property inducing people to get into “loan” transactions that were guaranteed to fail, which the mega banks were betting on, so they would win going both ways. They did the same thing to investors with fraudulent appraisals (ratings) inducing people to get into MBS transactions, which were guaranteed to fail, and which the mega banks were betting on, so they could win going both ways.

What he is saying is that it is too hard to explain to people who have been paying their mortgage payments why others, who were not paying their mortgage payments, are getting a break. What he means is that if they DID explain it as a clawback from a fraudulent series of transactions, millions more people, whether they were paying or not, would demand their money back too. They will realize that just because they CAN afford to take the loss on a fraudulent transaction, doesn’t mean they SHOULD take the loss any more than anyone else.

And THAT in turn would be the end of the mega banks and the grip on this country’s power structure. because it would deplete every bit of equity they have and remove them from the table of active players in banking, leaving the REST of the banking industry, consisting of over 7,000 banks and credit unions to pick up the pieces which will be remarkably easy to do, and will produce no catastrophe other than for the those who continue to benefit from a PONZI scheme that is remaining alive, morphing into the next great catastrophe.

See Simon Johnson’s extremely clear, well written analysis, with citations and back-up for everything he says and I say www.baselinescenario.com.

AND Moynihan is issuing a tacit threat: everyone who relies on dividend income and is expecting dividend income from BOA will be on the short end of the stick — kind of like the lowest people in every PONZI scheme. I’m not saying they should be punished for believing this drivel from Moynihan. In a nation of laws, however, it is no argument at all to leave “well enough alone” if it means that victims remain uncompensated because other people, possibly without knowledge of the tainted aspect of the money, will lose.  Such shareholders in the mega banks may also be victims, at least some of them, and they may have their remedies too. In the end, there won’t be enough money to go around to satisfy everyone, but one thing is for sure — in a nation of laws — the perps should do the walk, not the victims.

LLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLL

NY Times

Bank Chief Rejects Idea of Reducing Home Loans

By NELSON D. SCHWARTZ

Showing resistance for the first time against government pressure to write off tens of billions worth of mortgage debt, Bank of America executives said on Tuesday that the idea was unworkable and warned that it would be unfair to borrowers who had managed to stay current on their loans.

“There’s a core problem that if you start to help certain people and don’t help other people, it’s going to be very hard to explain the difference,” said Brian T. Moynihan, the chief executive of Bank of America. “Our duty is to have a fair modification process.”

All 50 state attorneys general, as well as a host of federal agencies, are pushing for a settlement over investigations into foreclosure abuses by major mortgage servicers that could cost the industry $20 billion or more. Much of that money would be earmarked to reduce principal owed by homeowners facing foreclosure.

But picking just who to help is among the thorniest questions facing government regulators, as well as the banks themselves. Even the most outspoken attorney general on the issue, Tom Miller of Iowa, acknowledged on Monday that too generous a program might encourage homeowners to walk away from properties where the value of the loan exceeded how much the underlying property was worth.

Indeed, industry experts estimate that nearly a trillion dollars worth of mortgage debt is “underwater,” a result of house prices having fallen since the original loans were made. Federal officials hope a settlement with the servicers will help individual borrowers and provide a cushion for the weak housing market.

Officials of Bank of America, the nation’s biggest mortgage servicer, argue that any effort to help troubled borrowers should not penalize borrowers who are underwater but have managed to make their monthly payments.

“There may be as much as $1 trillion worth of mortgages that are underwater,” said Terry Laughlin, the Bank of America executive whose unit, Legacy Asset Servicing, handles mortgages that are delinquent or in default. “What do you do for those borrowers that have a job but have negative equity and have paid on time and honored their obligations?”

“This is an unsolvable question,” he said. “It’s a very slippery slope.”

The comments by Mr. Moynihan and Mr. Laughlin came at a daylong meeting with investors and analysts in New York, the first of its kind for Bank of America since 2007.

Despite fierce criticism by regulators and political leaders that its efforts to help troubled borrowers have fallen short, Bank of America executives insist that the number of successful modifications the bank has completed is on the rise. The bank says more than 800,000 mortgages have been modified in the last three years.

Writing down billions of principal now could actually retard the recovery by encouraging borrowers to default, they argue. “It’s not that we don’t want to help troubled borrowers,” Mr. Laughlin said. “It’s a moral hazard issue.”

Late last week, the attorneys general presented the five biggest mortgage servicers, including Bank of America, with a 27-page proposal that would drastically reshape how they deal with homeowners facing foreclosure. It did not include a specific dollar figure, but government officials say they want to combine any overhaul of the foreclosure process with a monetary settlement that could finance more modifications for troubled borrowers.

The existing modification program created by the Obama administration, known as HAMP, has helped far fewer borrowers than originally promised. It also faces fierce opposition from Republicans in the House of Representatives, who voted last week to kill the program.

Mr. Moynihan believes investors who hold trillions in mortgage securities have to be involved in any settlement. It is not exactly clear what role they would play as part of the settlement with the federal government.

Officials at Bank of America, as well as other large servicers, declined to comment on the specifics of the 27-page proposal, and the industry has been cautious about fighting back too aggressively, mindful of the tales of robo-signing and other abuses that prompted the investigation by the attorneys general and federal regulators last fall.

What’s more, consumers and politicians are keenly aware that Bank of America and other financial giants have staged a remarkable turnaround since the government bailed out the industry after the collapse of Lehman Brothers in 2008.

“I think reasonable minds will prevail on this,” Mr. Moynihan said. “We do push back and we get to reasonableness.”

Still, the comments at Tuesday’s investor meeting are a preview of the arguments the industry is poised to make more forcefully in the weeks ahead as it negotiates with the attorneys general and other regulators behind closed doors. On Monday, Mr. Miller said he hoped a settlement could be reached within two months.

As the huge volume of loan losses recedes and the economy improves, Mr. Moynihan said his company had the power to earn $35 billion to $40 billion a year. Bank of America lost $2.2 billion in 2010, weighed down by special charges and the lingering effects of the housing bust and the recession on consumers.

He also reiterated his position that the long wave of acquisitions undertaken by his predecessors was over. “I can’t stress enough to you how much of a peace dividend we’ll get without mergers,” Mr. Moynihan said. “That peace dividend is effectively a permanent dividend.” The bank intends to resume payouts to shareholders in the second half of 2011.

Simon Johnson: WILL THE FED CRUMBLE?

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Is the New York Fed Making a Big Mistake?

EDITORIAL COMMENT:

You might think that getting rid of the FED is a good idea and if there are no changes in FED policy I might agree with you. I still maintain my optimistic and my hope.

Johnson, a well-known, well respected economist formerly with the IMF called the shots in advance, told us the consequences, told us the remedy and still we do nothing. Policy makers are tone deaf to the fact that we are still playing the same game with Wall Street,and that the “banks own the place.” (Senator Dick Durbin, Illinois). Johnson is joined by dozens of well-known and well respected economists and financial analysts who see us merrily speeding toward our doom. The average Joe and Jane on the street understands that we need to address the truth of this matter — we let Wall Street get out of hand and we are slow to put referees back on the field who understand the game.

The former home of our current Treasury secretary, the NY Federal Reserve, is leading the way on terms and data supplied strictly by Wall Street without regard to those of us who understand that things can get worse although it is difficult to imagine the scenario. Johnson is once again sounding the alarm. Is anyone listening? There is plenty to do including dismantling the behemoth monstrosities whose management doesn’t even possess the resources to track all the activities of any one, much less all, of the mega banks. If they are unmanageable they are clearly not regulatable (if that is a word). With “financial services” accounting for close to 50% of what we now count as our gross domestic product servicing an economy that seems to be doing less and less in real services and products, there is lot to do.

But instead of rolling our sleeves up and getting into the dirt to clean up the mess, the NY Federal Reserve continues the same path that led the FED and the country (along with the rest of the world) off a cliff. BOTTOM LINE: LIP SERVICE INSTEAD OF CORRECTIVE ACTION. PROGNOSIS: TERMINAL.

Like the famed Ostrich, our decision-makers are stuck in the sand examining one grain of sand at a time. The elephant in the living room is that proprietary currency, at the urging of Alan Greenspan while FED chairman, has out-paced genuine government currency 12:1, and the situation is getting worse.

Without tackling the challenging task of dismantling of the bank oligopoly, the amount of leverage the FED has on monetary, fiscal or economic policy is minimal. Do the math. Right now the Fed is busy supplying more money through purchases of Treasury bonds, made necessary because the government is out of money. The amount: $600 BILLION. Sounds like a lot of money, right? Wrong. The notional value of all proprietary currency is around one thousand times the size of the latest FED move, which places the effect at just around one-tenth of one percent.

Thus while Johnson and others cry out for reform that will do us some good, the FED is playing around with a few basis points like a $2 broker of yesteryear. In plain language we are still wandering off course without meaningful policy decisions being made by government. The “banks own the place” (Senator Durbin, Illinois) and we are sitting ducks in a zoo of animal analogies.

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By SIMON JOHNSON
Today's Economist

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

An uncomfortable dissonance is beginning to develop within the Federal Reserve.

On the one hand, current and former senior officials now generally agree with the proposition that our leading banks need more capital – that is, more equity relative to what they borrow. (The argument for this has been made most forcefully by Prof. Anat Admati and her distinguished colleagues.)

The language these officials use is vaguer than would be ideal, and they refuse to be drawn out on the precise numbers they have in mind. The Swiss National Bank, holding out for 19 percent capital, and the Bank of England, pushing for at least 20 percent capital, seem to be further ahead and much more confident of their case on this issue.

But an important split appears to be emerging within the Federal Reserve, with the Board of Governors (perhaps) and some regional Feds (definitely) tending to want higher capital levels, while the New York Fed is – incredibly – working hard to enable big banks actually to reduce their capital ratios (in the first instance by allowing them to pay increased dividends).

Officials at the New York Fed with whom I and others have spoken appear to be hardening their position against requiring big banks to maintain more capital (beyond the insufficient increases in the Basel III agreement), though no formal position has yet been taken. These officials will not speak on the record nor provide any details about their arguments or whatever evidence they have developed to support them.

So it is hard to know if any analytical basis exists for their evolving position. They have certainly put up no meaningful counterarguments to the powerful points made by Professor Admati and her colleagues – both in general and against allowing United States banks to increase their dividends now (see also this letter published in The Financial Times).

The single public document from the New York Fed on this issue is a working paper that appeared recently on its Web site. This paper simply assumes the answer it seeks: that higher capital requirements will lower growth, and it refuses to engage with the arguments and evidence to the contrary.

The empirical findings presented fall somewhere between weak and unbelievable. If this is the basis for policy making within the Federal Reserve System, I will be very surprised.

The key point is this. Given that the final capital requirements under Basel III remain to be set by the Fed – and top officials say they are still working on this – what’s the big rush to pay dividends? Retaining earnings (that is, not paying dividends) is the easiest way to build capital (shareholder equity) in the banks.

There is strong logic behind not paying dividends until capital is at or above the level needed for the future.

Without any substance on its side, the New York Fed is increasingly creating the perception that it is just doing what its key stakeholders – the big Wall Street banks – want.

Bankers traditionally dominate the boards of regional Feds. We can argue about whether this is a problem for most of them, but for the New York Fed the predominance of big Wall Street institutions has become a major concern.

At the bottom of the Web page listing its current board members, you can review who belonged to the board every year from 2000 to 2008. Note the presence of influential bankers in the past such as Richard Fuld (Lehman), Stephen Friedman (Goldman) and Sanford Weill (Citigroup). Their firm hand helped guide the New York Fed into the crisis of 2007-8.

The Dodd-Frank legislation reduced the power of big banks slightly in this context, so that the president of the New York Fed is no longer picked by Wall Street’s board representatives (as was Timothy F. Geithner, who was president of the New York Fed until being named Treasury secretary, and William Dudley, the current president and former Goldman Sachs executive).

But the current board of the New York Fed still includes Jamie Dimon, the head of JPMorgan Chase and an outspoken voice for allowing banks to operate with less capital by paying out dividends.

In fact, Mr. Dimon has a theory of “excess capital” in banks that is beyond bizarre – asserting that banks (or perhaps any companies) with strong equity financing will do “dumb things.” This is completely at odds with reality in the American economy, where many fast-growing and ultimately successful companies are financed entirely with equity.

If the New York Fed’s top thinkers have convincing reasons for not wanting to increase capital in our largest banks – if, for example, they agree with Mr. Dimon – they should come out and discuss this in public (and some evidence to support their thinking would be nice).

If the New York Fed were really pushing for higher dividends at this time — for example, by constructing a stress test to justify this action — it would be setting us up to mismanage credit, allowing the megabanks to misallocate resources during the good times and crash just as badly when the next downturn comes.

The top leadership of the New York Fed has a responsibility to engage constructively and openly in the technical debate. Yet some Federal Reserve officials act as if they have a constitutional right to run an independent central bank. This is not the case: Congress created the Fed, and Congress can amend how the Fed operates.

The legitimacy of the Federal Reserve System rests on its technical competence, its ability to remain above the political fray and the extent to which it can avoid being captured by special interests.

The danger that the New York Fed will fatally undermine the fragile credibility of the rest of the Federal Reserve System is very real.

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 www.baselinescenario.com.

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).

By SIMON JOHNSON
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.

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