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Geithner’s E-Mails, Phone Logs Subpoenaed by House

Jan. 13 (Bloomberg) — The Federal Reserve Bank of New York was ordered by a House committee to provide Timothy Geithner’s e-mails, phone logs and meeting notes tied to the bailout of American International Group Inc.

The subpoena from House Oversight and Government Reform Committee Chairman Edolphus Towns demands by Jan. 19 all documents related to the New York Fed decision to fully reimburse banks that bought protection from AIG and efforts to persuade AIG to keep information about the payments from the public, Towns said in a statement today.

“We need to understand why and how taxpayer dollars were used to bail out the same people who helped cause the financial crisis in the first place,” Towns said in a statement. Geithner, who was president of the New York Fed when AIG was rescued, is now President Barack Obama’s Treasury secretary.

The New York Fed had resisted since November calls to provide documents without a subpoena, Darrell Issa, the ranking Republican on the oversight committee, said yesterday in a letter. The New York Fed asked AIG in 2008 and 2009 to remove information about the bank payments from regulatory filings, according to e-mails released by Issa last week.

The subpoena also called for documents from New York Fed General Counsel Thomas Baxter, Stephen Friedman, a former New York Fed director and current Goldman Sachs Group Inc. director, and Sarah Dahlgren, a New York Fed senior vice president who manages its AIG oversight team. Towns also demanded term sheets related to payments to AIG’s credit-default swap counterparties.

Full Payment

Deborah Kilroe, a spokeswoman for the New York Fed, declined to comment. She said yesterday that the New York Fed will “work with the committee to provide relevant information as appropriate.”

Geithner made the decision to pay banks 100 cents on the dollar for their AIG swaps tied to subprime mortgages even though the underlying assets had declined in value, according to a November report by the government watchdog overseeing the bailout program. Banks including Goldman Sachs Group Inc. and Societe Generale SA were among beneficiaries of AIG’s rescue, called by lawmakers a “backdoor bailout” for financial firms.

The insurer’s rescue “provided AIG’s counterparties with tens of billions of dollars they likely would have not otherwise received,” wrote Neil Barofsky, the special inspector of the U.S. Troubled Asset Relief Program.

Reference Crossed Out

AIG planned to disclose in December 2008 that it fully reimbursed the banks to retire the swaps contracts. The New York Fed crossed out the reference to the full payments in a draft of a regulatory filing, according to the e-mails released by Issa, and AIG excluded the language when the filing was made public Dec. 24, 2008.

Geithner was also asked by the oversight committee last week to testify in public hearings about what he knew of the New York Fed’s efforts to limit the disclosure. Baxter said last week that Geithner wasn’t aware of the issue because the lawyer didn’t think it merited Geithner’s attention.

Andrew Williams, a spokesman for the Treasury, declined to comment on the demand for Geithner’s e-mail from his time at the New York Fed.

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Andrew Frye in New York at afrye@bloomberg.net.

Last Updated: January 13, 2010 18:11 EST

Origins of an American Kleptocracy

Submitted by Marla Singer

Some days ago we wondered aloud at the blank check extended to Fannie and Freddie along with the suspiciously convenient timing of those announcements on Christmas Day.  Back then we wondered if we had been told the entire story.  To wit:

So.  Let us summarize:

We do not expect the GSEs to grow their portfolios at all, so we are fixing the bloated portfolio problem by easing the portfolio caps to permit a quarter trillion dollar expansion thereof.

We do not expect either of the GSEs to need more help from the Treasury, so we are responding to the underutilized $400 billion “lifeline” the GSEs have with the Treasury ($111 of which is currently used) by expanding it to… infinity.

Oh, and though they have collectively lost nearly $200 billion, we are paying the CEOs around $6 million each.

Great work team!  It’s already almost 11:00.  Let’s go to lunch.

The other shoe having now dropped, Bloomberg has joined in our skepticism:

Taxpayer losses from supporting Fannie Mae and Freddie Mac will top $400 billion, according to Peter Wallison, a former general counsel at the Treasury who is now a fellow at the American Enterprise Institute.

“The situation is they are losing gobs of money, up to $400 billion in mortgages,” Wallison said in a Bloomberg Television interview. The Treasury Department recognized last week that losses will be more than $400 billion when it raised its limit on federal support for the two government-sponsored enterprises, he said.

Wallison continues:

“It was always safe to buy these notes,” he said. The U.S. government was always going to stand behind them. They’re as good as Treasury notes.”

We are no longer sure this is the most inspiring comparison. Wallison also chimes in via the Wall Street Journal and points to a darker vein shot through the GSE story:

New research by Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A.

In general, a subprime mortgage refers to the credit of the borrower. A FICO score of less than 660 is the dividing line between prime and subprime, but Fannie and Freddie were reporting these mortgages as prime, according to Mr. Pinto. Fannie has admitted this in a third-quarter 10-Q report in 2008.

But because of Fannie and Freddie’s mislabeling, there were millions more high-risk loans outstanding. That meant default rates as well as the actual losses after foreclosure were going to be outside all prior experience. When these rates began to show up early in 2007, it was apparent something was seriously wrong with assumptions on which AAA ratings had been based.

Losses, it was now certain, would invade the AAA tranches of the mortgage-backed securities outstanding. Investors, having lost confidence in the ratings, fled the MBS market and ultimately the market for all asset-backed securities. They have not yet returned.

It has become conventional wisdom, perhaps even cliche, to pin the origins of the credit crisis on the big banks or, AIG or even the practice of financial modeling.  Certainly, these actors have received the most play in the media, and have now endured the focus of populist ire for more than a year.  We now think that the analysis leading commentators to focus blame on these entities is fatally flawed.

We have seen no credible data that any of the large banks or other underwriters of mortgage backed securities (“MBSs”) or collaterized debt obligations (“CDOs”) or firms like AIG selling protection on same actually misrepresented the character of underlying collateral.  This is in direct contrast to the allegations of Edward Pinto as printed by the Wall Street Journal.  If Pinto is correct such that the mis-marking of mortgages by the GSEs and the discovery thereof destroyed confidence in the accuracy of ratings in mortgage backed securities and their derivatives (and it seems probable to suspect that he is) then it seems almost beyond question that the policies (or policy malfeasance) of Fannie and Freddie, and not the actions of large banks or firms like AIG are the proximate cause of not just the credit crisis, but also the continuing multi-act, multi-bailout farce that continues to be passed off to the public as necessary “stimulus.”

It takes only a cursory examination to suspect that misdirection plays a key part in the latest act of the ongoing crisis theater of the absurd.  Misdirection to distract attention from the key complicity of GSEs in the crisis.  Misdirection to deflect scrutiny away from the political personalities from both sides of the aisle responsible.  Misdirection to conceal what could only be described as the most damaging acts of accounting and securities fraud in the history of accounting, securities or fraud.

Precious few assumptions are required to come to conclusions laying responsibility for the largest economic disaster in recent memory at the feet of the GSEs.

First, that the GSEs had substantial influence over the mortgage market.

This is a no-brainer with the GSEs either holding or guaranteeing 51% of outstanding home mortgage debt in 2003.  To put this in perspective, that figure was around 33% of the GDP of the entire United States in 2003.  Read that last line again.  Anyone wishing to play in the market had to compete with the rates set by Fannie and Freddie.

Second, that the GSEs artificially depressed rates (read: underpriced risk).

This is equally trivial to find given that this precise mandate has been the express purpose of the GSEs since at least 1993.  The GSEs were not tasked with increasing the capacity for mortgage lending.  They were tasked with making loans “affordable.”  They used a number of tools to do so, but the key elements were acting as a proxy for quasi-government guarantees and bundling mortgages into risk tiers to act as a sort of clearing house for securitization pools.  It is often said that providing a guarantee (particularly governmental) reduces risk.  This is, of course, a fantasy.  All that explicitly or implicitly tax dollar backed guarantees do is socialize risk.  However, they manage to do so without requiring consolidation of the resulting liabilities on the government’s balance sheet.  Convenient that, yes?  A guarantee is a subsidy.  Period.  Failing to understand this is what permitted the political class to mislead the American public into thinking that cheap loans for everything from housing to small businesses to education (the next fiscal disaster on the horizon) come with no cost.  (Or that cheap debt wouldn’t pump up the price of everything from education to housing).  Today’s pundits seem to enjoy blaming “moral hazard” (by which they mean “corporate moral hazard”) for the crisis.  Oddly, government guarantees, particularly those that everyone assumes will be costless, are not typically part of this definition.

These assumptions, on their own should be sufficient to indict the GSEs, the totally unqualified and unaccountable recipients of political payoffs who occupied the executive offices of these fiscal singularities1 and their other supporters (including the voters who continued year after year to return these jokers to public office) on charges of gross negligence.

If, as Pinto suggests, we add purposeful misrepresentation of underlying collateral to the mix three things become apparent:

First, absent some intervening criminal act by actors farther downstream (and we may yet find some), we have isolated absolutely the cause of all that followed.

Second, it becomes quite easy to construct a criminal case for literally millions of counts of accounting, securities, wire and mail fraud against the GSEs.  To the extent executives at Fannie and Freddie signed off on financial statements disclosing the portion of their balance sheets that held “AAA” securities and these had been purposefully misidentified we should be exploring prosecution for violations under e.g., Sarbanes-Oxley.  (Given, however, Rham Emanuel’s involvement in Freddie and Fannie, we aren’t holding our breath).

Third, given the presence of blatant government price fixing in more than a third of the entire economy, the United States hasn’t been anything like a “free market” since before 2003.

It should shock you that literally a third of the U.S. economy should become a playground for the social experiments of any political group of any party affiliation.

It probably will not shock you (since you are reading Zero Hedge) to find what may be the largest example of securities fraud ever directly connected to elected officials of the United States and their cronies.

Taking a step back, it should shock you that power over literally a third of the U.S. economy should ever have been allowed to become concentrated in two entities with blatantly socialist aims and under the control of executives with no relevant qualifications of any note other than loose purse strings on their political contribution satchels.

What should grip readers with even more substantial alarm is the combination of blank checking for Fannie and Freddie backstops, and the shifty manner in which these disclosures were made.  Is it possible anymore to doubt that the administration simply lied through its teeth while promising us it expects no need of increased credit lines for the GSEs while simultaneously expanding same literally to infinity?

Given that Fannie, Freddie and the FHA have now taken up the mandate of supporting housing prices at any cost (to the taxpayer via endless bailouts and unlimited credit) is it possible in any way to credit the current “upturn” to fundamentals?  When we factor in similar capture of the FDIC and the like, where does this leave us, exactly?

Permit us to ask a few questions:

1.  Why are Fannie and Freddie still operating in any way whatsoever?

2.  Given that their credibility for reliable (or even remotely non-fiction) financial disclosure nears complete obliteration, who is likely to buy anything from these entities in the future?  (If you said “The Fed” you may advance to the bonus round).  Surely the conflict of interest implicit in government ownership does nothing to improve the situation.  Perhaps the news that the Fed plans to issue securities to shrink its balance sheet and reverse “quantitative easing” describes an attempt to securitize the tattered reputation of the GSEs?  Will the Fed simply aggregate its balance sheet and issue tranches?  Does that make the Fed simple the collateralized debt obligation (“CDO”) of last resort?  Who will do the rating?  Who will be writing protection on CDO Fed Tranch A-1 (AAA)?

3.  Given that neither entity is currently monitored by an Inspector General (despite what used to be statutory language so mandating) and both entities are completely captured by the current administration, how can it be anything other than insanity to expect any result from these entities other than the formation (or expansion) of a ravenous fiscal black hole?

4.  Given increasing government control beyond Fannie and Freddie that now extends far beyond 33% of GDP, what can we expect if we continue to permit political parties of any stripe to exercise command and control influence over what is now probably a simple majority of our economy?

There was a time when we hoped that the United States would learn its lesson with respect to permitting political control over large swaths of private markets.  Today that time seems very long ago, and somewhat naive.

Perhaps we are being too harsh on the likes of Barney Frank and other GSE proponents.  Adopting a slighty more relativistic economic morality, we might count Frank as one of the greatest legislators of all time.  Consider:

To the extent Mr. Frank and his ilk self-identify as advocates for low-cost housing for those ill-able to afford it, or beset by poor credit, the last 20 years have represented the largest single wealth transfer (composed primarily of real estate and flat screen TVs) to that sector known to us.  Not only that, but given the de facto nationalization of MBS portfolios (we’ll give you three guesses who have been the largest MBS buyers over the last several quarters) the GSEs and their supporters have managed to get taxpayers to pay for it all.  Of course, had they simply proposed such a measure in Congress it would have been laughed from the chamber.  And yet, it almost seems as if these individuals simply wrote a multi-trillion dollar check to their constituents that happened to be drawn on the United States Treasury.

It almost seems this way because it was this way.

1. 1. Just consider Fannie Mae’s torrid leadership history: James A. Johnson (Fannie CEO 1991-1998, Democratic luminary, Obama fundraiser, John Kerry vice presidential selection committee chair, $21 million in Fannie compensation). Franklin Raines (Fannie CEO 1999-2004, Clinton’s Director Office of Management and Budget, $90 million+ in Fannie compensation later the subject of a civil suit) Daniel Mudd (Fannie CEO 2005-2008, $80 million in Fannie compensation) Herbert M. Allison (Fannie CEO 2008-2009, National Finance Chair, John McCain Campaign).  Freddie’s record is no better.

SIGN THE PETITION HERE

? Washington’s Blog.

Why isn’t the government breaking up the giant, insolvent banks?

We Need Them To Help the Economy Recover?

Do we need the Too Big to Fails to help the economy recover?

No.

The
following top economists and financial experts believe that the economy
cannot recover unless the big, insolvent banks are broken up in an
orderly fashion:

• Nobel prize-winning economist, Joseph Stiglitz

• Nobel prize-winning economist, Ed Prescott

• Dean
  and professor of finance and economics at Columbia Business School, and
  chairman of the Council of Economic Advisers under President George W.
  Bush, R. Glenn Hubbard

• MIT economics professor and former IMF chief economist, Simon Johnson (and see this)

• President of the Federal Reserve Bank of Kansas City, Thomas Hoenig (and see this)

• Deputy Treasury Secretary, Neal S. Wolin

• The President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, Camden R. Fine

• The Congressional panel overseeing the bailout

• The head of the FDIC, Sheila Bair

• The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz

• Economics professor and senior regulator during the S & L crisis, William K. Black

• Economics professor, Nouriel Roubini

• Economist, Marc Faber

• Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales

• Economics professor, Thomas F. Cooley

• Former investment banker, Philip Augar

• Chairman of the Commons Treasury, John McFall

Others, like Nobel prize-winning economist Paul Krugman, think that the giant insolvent banks may need to be temporarily nationalized.

In addition, many top economists and financial experts, including Bank of Israel Governor Stanley Fischer – who was Ben Bernanke’s thesis adviser at MIT – say that – at the very least – the size of the financial giants should be limited.

Even the Bank of International Settlements – the “Central Banks’ Central Bank” – has slammed too big to fail. As summarized by the Financial Times:

The
report was particularly scathing in its assessment of governments’
attempts to clean up their banks. “The reluctance of officials to
quickly clean up the banks, many of which are now owned in large part
by governments, may well delay recovery,” it said, adding that
government interventions had ingrained the belief that some banks were
too big or too interconnected to fail.

 

This was dangerous because it reinforced the risks of moral hazard
which might lead to an even bigger financial crisis in future.

If We Break ‘Em Up, No One Will Lend?

Do we need to keep the TBTFs to make sure that loans are made?

Nope.

Fortune pointed out
in February that smaller banks are stepping in to fill the lending void
left by the giant banks’ current hesitancy to make loans. Indeed, the
article points out that the only reason that smaller banks haven’t been
able to expand and thrive is that the too-big-to-fails have decreased
competition:

Growth for the nation’s smaller banks
represents a reversal of trends from the last twenty years, when the
biggest banks got much bigger and many of the smallest players were
gobbled up or driven under…

 

As big banks struggle to find a way forward and rising loan losses
threaten to punish poorly run banks of all sizes, smaller but well
capitalized institutions have a long-awaited chance to expand.

BusinessWeek noted in January:

As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners…

At a congressional hearing on small business and the economic
recovery earlier this month, economist Paul Merski, of the Independent
Community Bankers of America, a Washington (D.C.) trade group, told
lawmakers that community banks make 20% of all small-business loans,
even though they represent only about 12% of all bank assets.
Furthermore, he said that about 50% of all small-business loans under
$100,000 are made by community banks…

Indeed, for the past two years, small-business lending among community
banks has grown at a faster rate than from larger institutions,
according to Aite Group, a Boston banking consultancy. “Community banks
are quickly taking on more market share not only from the top five
banks but from some of the regional banks,” says Christine Barry,
Aite’s research director. “They are focusing more attention on small
businesses than before. They are seeing revenue opportunities and
deploying the right solutions in place to serve these customers.”

And Fed Governor Daniel K. Tarullo said in June:

The
importance of traditional financial intermediation services, and hence
of the smaller banks that typically specialize in providing those
services, tends to increase during times of financial stress. Indeed,
the crisis has highlighted the important continuing role of community
banks…

For example, while the number of credit unions has declined by 42
percent since 1989, credit union deposits have more than quadrupled,
and credit unions have increased their share of national deposits from
4.7 percent to 8.5 percent. In addition, some credit unions have
shifted from the traditional membership based on a common interest to
membership that encompasses anyone who lives or works within one or
more local banking markets. In the last few years, some credit unions
have also moved beyond their traditional focus on consumer services to
provide services to small businesses, increasing the extent to which
they compete with community banks.

Indeed, some very smart people say that the big banks aren’t really focusing as much on the lending business as smaller banks.

Specifically
since Glass-Steagall was repealed in 1999, the giant banks have made
much of their money in trading assets, securities, derivatives and
other speculative bets, the banks’ own paper and securities, and in
other money-making activities which have nothing to do with traditional
depository functions.

Now that the economy has crashed, the big banks are making very few loans to consumers or small businesses because they still
have trillions in bad derivatives gambling debts to pay off, and so
they are only loaning to the biggest players and those who don’t really
need credit in the first place. See this and this.

So we don’t really need these giant gamblers. We don’t really need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are dedicated lenders.

The Fortune article discussed above points out that the banking giants are not necessarily more efficient than smaller banks:

The
largest banks often don’t show the greatest efficiency. This now seems
unsurprising given the deep problems that the biggest institutions have
faced over the past year.

 

“They actually experience diseconomies of scale,” Narter wrote of
the biggest banks. “There are so many large autonomous divisions of the
bank that the complexity of connecting them overwhelms the advantage of
size.”

And Governor Tarullo points out some of the benefits of small community banks over the giant banks:

Many
community banks have thrived, in large part because their local
presence and personal interactions give them an advantage in meeting
the financial needs of many households, small businesses, and
agricultural firms. Their business model is based on an important
economic explanation of the role of financial intermediaries–to
develop and apply expertise that allows a lender to make better
judgments about the creditworthiness of potential borrowers than could
be made by a potential lender with less information about the
borrowers.

A small, but growing, body of research suggests that the financial
services provided by large banks are less-than-perfect substitutes for
those provided by community banks.

It is simply not true
that we need the mega-banks. In fact, as many top economists and
financial analysts have said, the “too big to fails” are actually
stifling competition from smaller lenders and credit unions, and
dragging the entire economy down into a black hole.

The Giant Banks Have Recovered, And Are No Longer Insolvent?

Have the TBTFs recovered, so that they are no longer insolvent?

Negatory.

The giant banks have still not put the toxic assets hidden in their SIVs back on their books.

The tsunamis of commercial real estate, Alt-A, option arm and other loan defaults have not yet hit.

The
overhang of derivatives is still looming out there, and still dwarfs
the size of the rest of the global economy. Credit default swaps have arguably still not been tamed (see this).

Indeed, Nobel prize winning economist Joseph Stiglitz said recently:

The
U.S. has failed to fix the underlying problems of its banking system
after the credit crunch and the collapse of Lehman Brothers Holdings
Inc.

 

“In the U.S. and many other countries, the too-big-to-fail banks
have become even bigger,” Stiglitz said in an interview today in Paris.
“The problems are worse than they were in 2007 before the crisis.”

 

Stiglitz’s views echo those of former Federal Reserve Chairman
Paul Volcker, who has advised President Barack Obama’s administration
to curtail the size of banks, and Bank of Israel Governor Stanley
Fischer, who suggested last month that governments may want to
discourage financial institutions from growing “excessively.”

While the big boys have certainly reported some impressive profits in the last couple of months, some or all of those profits may have been due to “creative accounting”, such as Goldman “skipping” December 2008, suspension of mark-to-market (which may or may not be a good thing), and assistance from the government.

Some
very smart people say that the big banks – even after many billions in
bailouts and other government help – have still not repaired their
balance sheets. Tyler Durden, Reggie Middleton, Mish and others have looked at the balance sheets of the big boys much more recently than I have, and have more details than I do.

But the bottom line is this: If the banks are no longer insolvent, they should prove it. If they can’t prove they are solvent, they should be broken up.

The Government Lacks the Power to Break Them Up?

Does the government lack the power to break up the TBTFs?

Wrong.

One of the world’s leading economic historians – Niall Ferguson – argues in a current article in Newsweek:

[Geithner is proposing that] there should be a new “resolution
authority” for the swift closing down of big banks that fail. But such
an authority already exists and was used when Continental Illinois failed in 1984.

Indeed, even the FDIC mentions Continental Illinois in the same breadth as “too big to fail” banks.

And William K. Black (remember, he was the senior regulator during the S&L crisis, and is a Professor of both Economics and
Law) – says that the Prompt Corrective
Action Law (PCA), 12 U.S.C. § 1831o, not only authorizes the government
to seize insolvent banks, it mandates it, and that the Bush and Obama administrations broke the law by refusing to close insolvent banks.

Whether or not the banks’ holding companies can be broken up using the PCA, the banks themselves could be. See this

And no one can doubt that the government could find a way to break up even the holdign companies if it wanted.

FDR seized gold during the Great Depression under the Trading With The Enemies Act.

Geithner
and Bernanke have been using one loophole and “creative” legal
interpretation after another to rationalize their various
multi-trillion dollar programs in the face of opposition from the
public and Congress (see this, for example).

And the government could use 100-year old antitrust laws to break them up.

So
don’t give me any of this “our hands are tied” malarkey. The Obama
administration could break the “too bigs” up in a heartbeat if it
wanted to, and then justify it after the fact using PCA or another
legal argument.

Is Temporarily Nationalizing the Giant Banks Socialism?

Many argue that it would be wrong for the government to break up the banks, because we would have to take over the banks in order to break them up.

That
may be true. But government regulators in the U.S., Sweden and other
countries which have broken up insolvent banks say that the government
only has to take over banks for around 6 months before breaking them up.

In
contrast, the Bush and Obama administrations’ actions mean that the
government is becoming the majority shareholder in the financial giants
more or less permanently. That is – truly – socialism.

Breaking
them up and selling off the parts to the highest bidder efficiently and
in an orderly fashion would get us back to a semblance of free market
capitalism much quicker.

The Real Reason the Giant Banks Aren’t Being Broken Up

So what is the real reason that the TBTFs aren’t being broken up?

Certainly, there is regulatory capture, cowardice and corruption:

• Joseph Stiglitz
  (the Nobel prize winning economist) said recently that the U.S. government is wary of challenging the
  financial industry because it is politically difficult, and that he
  hopes the Group of 20 leaders will cajole the U.S. into tougher action

• Economic historian Niall Ferguson asks:
  

  Guess
  which institutions are among the biggest lobbyists and campaign-finance
  contributors? Surprise! None other than the TBTFs [too big to fails].

• Manhattan Institute senior fellow Nicole Gelinas agrees:
  

  The
  too-big-to-fail financial industry has been good to elected officials
  and former elected officials of both parties over its 25-year life span

• Investment analyst and financial writer Yves Smith says:
  

  Major financial players [have gained] control over the all-important over-the-counter debt markets…It is pretty hard to regulate someone who has a knife at your throat.

• William K. Black says:
  

  There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .

  Instead, the Treasury and the Fed are urging us not to
  examine the crisis and to believe that all will soon be well. There
  have been no prosecutions of the chief executives of the large nonprime
  lenders that would expose the “epidemic” of fraudulent mortgage lending
  that drove the crisis. There has been no accountability…

  The Obama administration and Fed Chairman Ben Bernanke have
  refused to investigate the nature and causes of the crisis. And the
  administration selected Timothy Geithner, who with then Treasury
  Secretary Paulson bungled the bailout of A.I.G. and other favored “too
  big to fail” institutions, to head up Treasury.

  Now Lawrence Summers, head of the White House National Economic
  Council, and Mr. Geithner argue that no fundamental change in finance
  is needed. They want to recreate a secondary market in the subprime
  mortgages that caused trillions of dollars of losses.

  Traditional
  neo-classical economic theory, particularly “modern finance theory,”
  has been proven false but economists have failed to replace it. No
  fundamental reform can be passed when the proponents are pretending
  that there really is no crisis or need for change.

• Harvard professor of government Jeffry A. Frieden says:
  

  Regulatory
  agencies are often sympathetic to the industries they regulate. This
  pattern is so well known among scholars that it has a name: “regulatory
  capture.” This effect can be due to the political influence of the
  industry on its regulators; or to the fact that the regulators spend so
  much time with their charges that they come to accept their world view;
  or to the prospect of lucrative private-sector jobs when regulators
  retire or resign.

• Economic consultant Edward Harrison agrees:Regulating Wall Street has become difficult in large part because of regulatory capture.

But there is an even more interesting reason . . .

The number one reason the TBTF’s aren’t being broken up is [drumroll] . . . the ‘ole 80′s playbook is being used.

As the New York Times wrote in February:

In
the 1980s, during the height of the Latin American debt crisis, the
total risk to the nine money-center banks in New York was estimated at
more than three times the capital of those banks. The regulators,
analysts say, did not force the banks to value those loans at the
fire-sale prices of the moment, helping to avert a disaster in the
banking system.

In other words, the nine biggest banks were all insolvent in the 1980s.

And the Times is not alone in stating this fact. For example, Felix Salmon wrote in January:

In
the early 1980s, when a slew of overindebted Latin governments
defaulted to their bank creditors, a lot of big global banks, Citicorp
foremost among them, became insolvent.

So the
government’s failure to break up the insolvent giants – even though
virtually all independent experts say that is the only way to save the
economy, and even though there is no good reason not to break them up – is nothing new.

William K. Black’s statement that the government’s entire strategy now – as in the S&L crisis – is to cover up how bad things are (“the entire strategy is to keep people from getting the facts”) makes a lot more sense.