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Archive for the ‘Financial Regulation’ Category

TWO Former IB CEOs Want Glass-Steagall Back

Posted by Karl Denninger

Governing class tightens its grasp on the levers of power

By Richard W. Rahn

The “Dodd financial reform” bill being considered by the Senate will make it illegal for 99.6 percent of the population to invest in needed new and promising start-up companies while at the same time ensuring that the 33 largest banks, which control 92 percent of all bank assets, will be required to purchase more federal government debt before giving loans to businesses and individuals. Quite simply, the government is continuing to practice financial fascism.

The new health care bill will require us to buy specified health insurance, whether it is appropriate for us or not. Government-run ads encourage people to buy tickets in government-run lotteries, where the expected value can be less than one-sixth of the ticket price. Yet the new financial reform bill will make it illegal to invest in a new venture or start-up company for anyone who does not have a liquid net worth of $2.2 million or an annual income of roughly $450,000 if single or $675,000 if married – which rules out all but fewer than 1 percent of the population. If this passes and is signed into law, Congress and the president will be saying to the American people, “Ninety-nine-plus percent of you are too stupid to know how to invest your own money.” (They think the rest of us are as irresponsible as they are.)

A major reason the American economy has prospered is that traditionally it has been easy to start a new business, and new businesses account for much of the innovation and job growth in the American economy. Inventors, from Thomas Edison (who started GE, among other companies) to the modern-day whizzes behind Apple, Google and all the rest, have relied on their ability to get “angel” investors to begin their companies. An angel investor is one who is willing to invest in a new and untried business with the hope of a very large return.

It is well known that there is a very high rate of failure among new businesses. For instance, more than 90 percent of all new restaurants fail within three years – but many of the ones that don’t fail become very profitable. For every new Apple, there are hundreds of failures. In the name of “investor protection,” the Securities and Exchange Commission (SEC) makes it almost mandatory that entrepreneurs approach only “accredited investors” when seeking investment capital. Currently, an accredited investor is a person who has a net worth of $1 million or an income of $200,000 per year. The SEC will argue that such a rule protects “widows and orphans” from unscrupulous promoters. This is the same SEC that failed to see the Madoff Ponzi scheme when it was dumped in its lap.

In fact, the rule makes little sense and strongly discriminates against knowledgeable people who are not yet wealthy but are quite capable of making good investment decisions while doing nothing to protect the medical doctor or professional basketball player who easily might meet the definition of an accredited investor but knows little about the risks of new ventures. Under the current rule, a young finance professor at a good university business school who makes $120,000 a year and has a net worth of just $500,000 would not be considered competent to invest in a promising new high-tech start-up, while a successful country-and-Western singer with an eighth-grade education and no experience in or knowledge of business or finance would be considered competent. The proposed rule in the financial reform bill will make this absurdity and loss of financial freedom far worse.

What right do the financial fascists in Washington, who created the world’s biggest financial Ponzi schemes (i.e., Social Security and Medicare) and the largest unsustainable debt in history, have to tell more than 99 percent of the rest of us what we can and cannot invest in?

Those in the same political class are ardent proponents of state lotteries, which typically give a ticket buyer one chance in 15 million of winning, with a payout of less than 50 percent of the ticket price. If one does win and decides to take a lump sum rather than a 30-year payout, the normal payment is one-third of the face amount, upon which the recipient will have to pay full federal and state income tax. Given President Obama’s new tax-increase proposals, a lottery winner in a high-tax state such as California would be paying about 50 percent of the winnings in tax. Thus, a person who buys a $1 ticket can expect to receive only about 7.5 cents in return. If this is not financial fraud, there is no such thing as financial fraud, but because it is practiced by government, it is deemed OK even though any private party doing the same thing would go jail.

At the same time the government class is doing its best to fleece the poor and math-challenged by promoting state lotteries, it is doing its best to prevent middle-class Americans from investing in new businesses that might become productive. Could this possibly have anything to do with who were the big financial givers to the Obama campaign and to the campaigns of the Democratic congressional committee chairmen?

The 1,300-page financial reform bill going through the Senate will, in essence, make the biggest banks (those considered too big to fail) wards of the state – which is classic financial fascism. The Obama Treasury, not the semi-independent Federal Reserve, will decide what these banks are allowed to invest in, in exchange for an unlimited U.S. government guarantee. Since September 2009, banks have been lending more to the government than to private industry. One does not have to be a rocket scientist to see where all this is headed.

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

NewsWithViews

By Joan Veon

There are those who have been talking about a single global regulator for years and as a result of the 2008 Credit Crisis, there have been calls to protect you and me from future banking crises through new financial reform. However, we had better consider its real impact. It is not about protecting you and me it is about changing the national regulatory laws of America to conform to a world governmental system and globalizing the last barrier separating individual nation-states. It is about a major power grab of America’s financial assets. As a result of the high stakes, we should ask if Republicans are being told they had better vote for financial reform so we don’t have another September/October, 2008? All of a sudden Senators McConnell and Shelby have had a sea change and are willing to work together on changing our banking system. It is a ruse, a con game when they say they are making the system safer. Let us review some necessary points.

As we consider the events of the past 18 months, we are confronted with a great deal of action, uncertainty, negativity, and pillaging of wealth. In order to understand where we are today and where we are going, we need to review the chicanery of the past eleven years.

One of the keynote events was the repeal of the 1933 Glass-Steagall Act in 1999 which we were told was necessary for banking modernization. In June 1999 then Treasury Secretary Robert Rubin said, “Reforming international financial institutions, strengthening the international financial architecture and maintaining open markets are not simply questions of economics but politics.” That same year, after a great deal of media and stock market hype and hysteria, Congress passed the Gramm-Leach-Bliley Act-GLB which tore down all the protections that the Glass-Steagall Act had put in place, including the separation of commercial banking from investment banking to protect the investor. It also allowed for U.S. banks to become “financial conglomerates” meaning they could expand their services to sell insurance, stocks and bonds and perform the once outlawed investment banking services, which opened the doors for derivatives, now at the heart of the problem. It also allowed for American banks, insurance companies and brokerage firms to buy foreign banks, insurance companies and brokerage firms while allowing them to come in and buy ours. Were there any regulatory changes? No. In fact it was known that the SEC was not beefing up their forces to police and monitor the newly expanded financial architecture.

On the international level, that same year, at the Bank for International Settlements-BIS in Basle, Switzerland, set up a new global entity called the Financial Stability Forum-FSF. It was comprised of regulators from the Group of Seven countries with a mandate to police the global level for problems. In an interview with Svein Andressen, its managing director, he told me in response to a question I raised in 2000 that “there was no guarantee” that they would be successful. Today, as a result of the G20 meetings in 2009, it has been reinvented into a larger body comprised of regulators from the G20 countries. It truly is more of a global regulator than it once was with only seven countries.

At the BIS and other think tanks there was a myriad of white papers calling for a consolidation of regulators and to change the national regulatory laws, now that the U.S. had passed GLB. Federal Reserve Board Vice Chairman Donald L. Kohn gave a speech in Sea Island, Georgia in May, 2007 in which he discussed the rise of credit derivatives and their marriage with securitization technologies called collateralized debt obligations-CDOs. While stating that “these developments have made the financial system more resilient to shocks,” he also said,

We need to accept that accidents will happen—that asset prices will fluctuate, often over wide ranges and those fluctuations will be driven in part by trading strategies, by the cycles of greed and fear that have always been with us and by the ebb and flow of competition for market share. The fluctuations will result in redistributions of wealth, and on occasion, will confront us with financial crises.

He then went on to explain some of the changes that needed to be made and commented,

In all of this work, coordination and cooperation among regulators, domestically and internationally are critical because the same firms are the core firms in each of the principal global financial centers.

Lastly, he stated, “In sum, there are good reasons to think that financial innovation over the past few decades, including the emergence and growth of the credit derivatives markets, has made the financial system and the economy more resilient.”

That year saw a number of headlines and articles calling for a “global regulator.” One written by Kenneth Rogoff read, “No grand plans, but the financial system needs fixing.” Another headline read, “Wanted: a guardian of the world’s financial system.”

In 2007, there was what was considered at first a minor problem in the subprime mortgage market—nothing to worry about. The market dropped from a high in July, 2007 of 14,022 to 12,518 that August before recovering that same year in October to the 14,198 level, an all time high. The Dow had risen 94% or 6,878 points since the low point of October 9, 2002. By August, 2008 the market had dropped to 11,483.

Hank Paulson, our second treasury secretary from Wall Street, had issued his “Blueprint for a Modernized Financial Regulatory System” in March, 2008. It called for a total revamping of all of America’s assets that were not under control of the Federal Reserve: the entire mortgage industry, banks that were not regulated by the Fed, credit unions, state chartered thrifts, and the insurance industry. The Fed was at the center of all the newly proposed commissions. In other words, a total take over of financial assets not under their control was at stake.

Is anyone putting two plus two together? The Federal Reserve is a private corporation so they do not issue an annual report and no one knows who their shareholders are. This company controls the entire monetary system of the United States which means they create the ups and the downs in the stock market and business cycle. They control credit. If they want to destroy the small businessman, they just stop issuing credit—like they are doing now. The Paulson Blueprint was blatant about them seizing control over all the other major financial assets they don’t control.

September 2008 found Congress in a heap of distress. When you consider the bombardment that we all went through, we have never seen or experienced anything like this since the British bombed the Baltimore Harbor in 1814 which is where the term “shock and awe” first came from. In September, we saw: the U.S. government seize Fannie Mae and Freddie Mac, Lehman Brothers collapsed and Merrill Lynch was purchased by Bank of America, AIG was bailed out with government money, Morgan Stanley and Goldman Sachs converted to bank holding companies, the government seized Washington Mutual which became the largest banking failure in the U.S., and Wachovia was taken over by Wells Fargo.

In the midst of shock and awe, the front page of the September 18, 2008 Washington Post read “Stocks Plummet as Lending Freezes Up.” It said that “Lawmakers left on the sidelines as Fed, Treasury take Swift action.” The text read,

The frenetic pace of the financial crisis has forced the Treasury Department and Federal Reserve to make rapid-fire decisions in recent days, leaving Capitol Hill lawmakers effectively impotent—and frustrated. Lawmakers on both sides have expressed concern yesterday that have had had no control over when and how federal money has been used to curb the panic on Wall Street. Congressional leaders learned of the rescue late Tuesday during a hastily called meeting. Paulson and Bernanke have taken the lead, not only from lawmakers but from President Bush.

In order to get Congress to pass the TARP monies and the additional powers for the Treasury Secretary, the stock market began to drop. On September 29 when the House rejected the bailout plan, it dropped more than 700 points. By October 10, the Dow had dropped to 7773.71. The week of October 11, 2008 saw the Dow drop by 22% or $8.4T from 2007 market highs. This was its worst week ever in its 112 year history. Who was boss? Those who control the monetary system including the stock market of the United States. Could this happen again? I have maintained that it could given the fact that the biggest change would be to pass the Paulson Blueprint which has been reinvented as the Obama “New Foundation.” I am amazed that nineteen/twenty months after September/October, 2008, the stock market is at a high: 11,125 which may mean if Congress does not pass financial regulation, it could drop back to the March 9, 2009 low. So how did we get in this position again?

On early October, Hank Paulson told and gave his word to senators that he would only use his additional powers in an extreme emergency. Eleven days later on October 14, he nationalized America’s banking system by giving $250B to Bank of America, Citigroup, Goldman Sachs, Bank of New York Mellon, JP Morgan, Morgan Stanley, State Street Bank and Wells Fargo. The Dow had dropped a total of 41% from the year earlier. Talk about warfare. No guns, no bullets but trillions of dollars transferred out of investors pockets, causing major destruction to America’s middle class. Throughout all of the various congressional sessions, both the Treasury Secretary and the Federal Reserve Chairman Ben Bernanke called for regulatory reform. This has been the mantra for a long time.

President Obama came into office in January, 2009. The stock market reached a severe low of 6,547 on March 9. From this point, the market started to rise. To date it is around 11,000, a rise of 4,453 points. Obama rolled out his version of Paulson’s Blueprint on June 17. It did not call for the Federal Reserve to chair all of the proposed committees like Paulson’s, but it did call for the Treasury Secretary to chair key committees and, in Section V, it called for very strong international regulatory standards and improved international cooperation. It stated that the,

United States is playing a very strong leadership role in efforts to coordinate International financial policy through the G20, the Financial Stability Board, and the Basel Committee on Banking Supervision.

The Obama Financial Regulatory Reform called for the Financial Stability Board to be restructured and institutionalized on the international level and for national authorities to implement the G20 commitments made in London in 2009 which included “supervisory colleges” that would be able to assess danger.

For the first part of 2010, financial reform took a back seat to health reform and on March 15, Senator Dodd rolled out his version of regulatory reform, leaving behind any kind of bi-partisanship that junior Senator Bob Corker had given earlier. A day after the passage of the healthcare bill on March 21, Senator Dodd pushed through the Senate Banking Committee a vote for the bill he authored six days earlier. This basically was a coup d’état over the Republican Party.

Sadly, most Americans are not aware of the marketing savvy that has gone into changing their minds and covering up the fraud perpetrated on them. Regulatory reform has gone from a “Bailout of Wall Street” to a “Bailout of Main Street.” There is now a movement by Republicans after the Security and Exchange Commissions first indictment in ten years of the biggest bank on Wall Street, Goldman Sachs, to move Congress into bi-partisanship. It has worked.

Sadly in light of the fact that Goldman Sachs has given untold millions to our currently seated politicians in Congress and $1M to Obama for his election campaign, the Republicans have decided to play “nice” at the wrong time. Or is it the wrong time? Are they being vigilant and protecting us against another 40% drop in the stock market or are they part of the con game?

Recently, in commenting on how Wall Street makes its money, Jim Santelli from CNBC said, “Where does Wall Street make its money? In murky deals. The more murkier, the more money they make.” In the April 23, 2010 Financial Times, their editorial commented on Obama’s legislation,

Prospects are good that the eventual reform will be a big step forward. But one should not expect too much even of a significantly improved system. As the economy recovers and financial markets’ appetite for risk revives, the chief danger may lie in placing too much confidence in the new arrangements. Financial regulation is, and always will be, a work in progress.

The truth is the stakes were very high for regulatory reform or else we would not have had all the activities of September/October 2008. The bottom line is the consolidation of power by the central banks all over the world. Through the enlarged structure of the Bank for International Settlements and the newly restructured and empowered global regulatory agency, the Financial Stability Board, all of the world’s assets are being shifted to a place where they are fair game for central bankers. All you have to do is study the arrangements on the national and global level. This is the con game of all the centuries–it is a colossal robbery of our nation and people.

If you cannot see from the above all of the boldfaced lies and grab of America’s financial assets, then you/we deserve what’s coming. Lastly, we can see that the next goal of these powerbrokers is a national sales tax so that we can reduce our debt. America is being stripped of her assets and her citizens are being put in greater and greater bondage through usury and taxation! It is only heaven that can help us now.

Derivatives To Be Spun Off?

Posted by Karl Denninger

FedUpUSA has been working hard for almost three years to expose the corruption and fraud in the financial industry and in our government, but what is being proposed right now does nothing to further that goal.

Americans for Prosperity put this out today:

Vote No On The So-Called ‘Financial Reform Bill’:

Bank stocks went up after Obama’s so-called financial reform speech.  That’s probably because his bill institutionalizes “too big to fail.”  It doesn’t break up the banks and it assures them access to Federal Reserve loans as needed.  It makes bailouts permanent.

 

The Goldman Sachs scandal exposes a deep flaw in the bill that we believe can generate enough public outrage to stop this bill – if we can educate people quickly.

 

This video lays it out clearly.

The Securities and Exchange Commission is investigating whether Goldman acted improperly, but there is no investigation into the left-wing Center for Responsible Lending, which facilitated both the creation of the subprime bubble and its collapse, while CRL’s major donors (John Paulson, Herb and Marion Sandler, and George Soros) made a fortune.

 

Please fill out the form below to tell Congress to vote NO on the fake reform bill and to demand a full investigation into the scandal.

CLICK TO TAKE ACTION:

Baum Makes Mincemeat of Bernanke’s Twisted Logic

In Ivory Tower Doesn’t Have a Mortgage, Bloomberg columnist Caroline Baum makes mincemeat out of Bernanke’s twisted defense of Fed policy.

Bernanke takes great pains to rebut criticism that the funds rate was well below where the Taylor Rule, developed by Stanford economist John Taylor, suggested it should be following the 2001 recession.

Substitute forecast inflation for actual inflation, and the personal consumption expenditures price index for the consumer price index, and — voila! — monetary policy looks far less accommodating, Bernanke said.

It’s always easier to start with a desired conclusion and retrofit a model or equation to prove it.

What if easy money is a necessary but not sufficient condition to explain the magnitude of housing bubbles across countries?

The real fed funds rate was negative from 2002 to 2005, the longest stretch since the 1970s, a decade notable for high inflation and unemployment. The teaser rates lenders offered on ARMs were pretty close to zero when adjusted for inflation.

When you can borrow for free and invest in an asset whose price can only go up (at least that was the perception about home prices), guess what happens? Credit is misallocated. Lending standards decline. Everyone wants in.

Yes, monetary policy is a blunt instrument, as Bernanke pointed out. Keep rates too low — create too much money — and sometimes that money chases goods and services prices, which we designate as inflation. Other times it piles into certain assets, which we call a bubble.

“The best response to the housing bubble would have been regulatory, not monetary,” Bernanke said, avoiding any reference to prevention.

The two aren’t substitutes. Relying on regulation to counteract the impetus of easy money is like using a split-rail fence to stop an auto with the accelerator pressed to the floor. They are different species, operating in different spheres.

All the regulation in the world can’t counteract the power of near-zero interest rates. At the same time, high interest rates won’t prevent financial institutions from engaging in shady practices. To think regulation can prevent the next asset bubble is naive.

Why is the Fed so fixated on inflation expectations and so blase about asset-price expectations? Aren’t they of a piece?

Taylor Rule Nonsense

The highly respected Taylor Rule is fatally flawed because it only looks at the CPI, while ignoring asset bubbles in virtually anything else, including housing.

I have pointed this out many times, most recently in Ben Bernanke Looks In Mirror, Sees Barney Frank.

Bernanke blames inadequate subprime regulation for the housing bubble.

Bernanke also takes refuge in the Taylor Rule although there is considerable disagreement over what it says. My take is the Taylor Rule is fatally flawed because it fails to take into consideration housing prices (asset prices in general).

Watch what happens when the Case-Shiller Housing Index is substituted for Owners’ Equivalent Rent (OER) in the CPI.

Case Shiller CPI vs. CPI-U

click on chart for sharper image

The above is from What’s the Real CPI?

The Fed could have and should have acted to rein in property bubbles, but Bernanke is so dense he could not even see there was a property bubble.

Substituting home prices for OER the CPI was running a hot 6%+ in mid 2004 with the Fed Funds Rate near .25%.

Who’s The Bigger Fool?

1) Taylor in all his hubris for believing his fatally flawed rule is the only policy tool the Fed needs
2) Bernanke for relying on it to the point of insanity

Academic Wonks vs. Practicality

Bernanke is an academic wonk, totally incapable of looking at policy in terms of anything other than formulas and his twisted ideas about the great depression.

Baum on the other hand shows impeccable logic with…

Relying on regulation to counteract the impetus of easy money is like using a split-rail fence to stop an auto with the accelerator pressed to the floor. All the regulation in the world can’t counteract the power of near-zero interest rates.

Indeed.

When the price of money is too low, it is virtually guaranteed to cause speculation in something. In 2000 it was Nasdaq and technology speculation. This go around it was housing, followed by commercial real estate, followed by immense commodity speculation driving the price of oil to $140.

The moral of this story is loose money always finds a home.

It is beyond absurd we have a Fed chairman that does not understand that simple construct or for that matter basic economics in general.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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