TARP

Years of Discontent Trigger American Autumn

Leo Gerard — Fri, 07 Oct 2011 11:15:10 -0400

To convey the significance of the Occupy Wall Street movement, NBC News anchor Brian Williams this week quoted the 1960s Buffalo Springfield song, For What It’s Worth:

“There is something happening here. What it is ain't exactly clear.”

Maybe it’s unclear what the Occupy Wall Street movement ultimately will accomplish. But what’s happening – for the past three weeks in New York and now in hundreds of towns across North America – is a roiling, inspirational, grassroots expression of anger, disgust and revolution.

And, frankly, given what’s been going on in the United States since the bank bailout, it’s amazing that this uprising didn’t precede the Arab Spring. The powers-that-be, from the rich and influential to their coin-operated politicians and corporate-owned media, have mocked and belittled and ignored the protesters, the 99 percenters as they call themselves – everyone but the richest one percent. No matter what the critics say, these young people, with righteous outrage and new age communication, have launched the American Autumn.

This revolt could have started in the spring of 2009, immediately after the Bush administration pushed through Congress the Troubled Asset Relieve Program (TARP), the $700 billion in taxpayer money spent to prop up banks that had gambled and lost untold trillions. A Bloomberg News investigation later would show that the United States lent, spent or guaranteed as much as $12.8 trillion to save the banks. Despite that help, the Wall Street recklessness ruined the American economy, throwing tens of millions out of jobs and homes.

Poverty and hunger skyrocketed in the richest country in the world. As tax revenue fell, states, towns and school districts slashed essential public services and laid off teachers, librarians, firefighters and police officers.

Maybe it just took this long for the middle class to grasp all the horrible effects of the Wall Street gambling and to realize that a government held hostage by country club conservatives bent on cutting public services just made matters worse. Maybe young people looked at unrestrained war spending, Pell Grant slashing and voter disenfranchising and decided they were fed up and not going to take foreclosure of their futures anymore.

Whatever the spark, the American Autumn began three weeks ago in New York City’s Zuccotti Park, formerly Liberty Square. Late in September, some of the one percenters sipped Champaign on an upscale restaurant balcony as they looked down on the protesters in the streets below. This week, as protests spread, wealthy risk-takers at the Chicago Board of Trade put signs in the windows of their ritzy offices bragging, “We are the 1 percent.” They don’t get it.

Nor does Bank of America. Here’s a bank bailed out by taxpayers that just announced it would begin imposing a new fee – $5 a month, $60 a year – on debit card users. This bank also just announced that it would worsen the recession caused by bankster recklessness by laying off 30,000 workers.

This is a bank that engaged in the habitual, anti-capitalistic Wall Street practice of rewarding poor executive performance by giving its CEO Brian T. Moynihan a $9 million bonus immediately after the institution he runs lost $2.2 billion in 2010. Moynihan responded to criticism of the $5 fee by saying customers – and ultimately taxpayers -- must line his pockets and that of shareholders, regardless of how badly he runs the bank or how stupidly he gambles with its money. That’s because, he asserted, the bank has a “right to make a profit.” No matter what.

The media and country club conservatives belittled the protesters. Here’s what Herman Cain, a Tea Partier seeking the GOP nomination for president, said:

“Don’t blame Wall Street, don’t blame the big banks if you don’t have a job or you’re not rich. Blame yourself!”

He continued:

“It’s not a person’s fault because they succeeded. It’s a person’s fault if they failed. And so this is why I don’t understand these demonstrations and what it is that they’re looking for.”

He called the protesters “anti-capitalist,” although it was the banks that sought a socialist bailout from the government when they got themselves in trouble.

Cain didn’t blame banksters for unemployment, even though it was Wall Street gambling that took down the economy. He blames the teachers and police officers thrown out of work by local governments that are cash-strapped as a result of the recession -- caused by Wall Street recklessness.

Cain and the media keep saying they don’t understand what the protesters want. They just don’t get it.

A specific list of demands is unnecessary. What the 99 percenters want is obvious. They want the American dream restored. Good public education for everyone. Equity in opportunity. Shared sacrifice so that the rich pay a tax rate at least equal to that charged the middle class. An end to poverty and unemployment in the richest country in the world.

In the Buffalo Springfield song, For What It’s Worth, lyrics talk of 1960s youths criticized for their protests:

“Young people speaking their minds
Getting so much resistance from behind.”

This time protesters will get backing. The members of my union, the United Steelworkers, get it. Members of the unions of the AFL-CIO and Change to Win federations get it.

We’re here to support the young people of the American Autumn.

What That Exposé of the Fed's Secret Bailout Told Us ... And What It Didn't

Richard Eskow — Thu, 25 Aug 2011 14:41:36 -0400

We've just learned about the Federal Reserve's extraordinary secret bailout of the country's big banks. We now know that the TARP bailout program was only the tip of the iceberg, and that financial institutions received a total of $1.2 trillion in loans and other funds while the rest of the country was left to struggle for economic survival.

We also know that, despite all that "we got our money back" rhetoric, these loans represent a cash giveaway to the banks that totals up to tens of billions of dollars - while homeowners and student loan borrowers continue to struggle.

Here's what we now know about this secret bailout, thanks to a Bloomberg report, along with what we already knew - and what we still don't know:

We now know that the 10 biggest banks in America received $669 billion in emergency loans from the Fed.

We already knew that the same 10 banks now own 77% of the country's banking assets, more than before the crisis, making them even more "too big to fail" than ever.

We now know that the low interest rates they received were, in fact, a massive transfusion of cash - courtesy of the American taxpayer -just like TARP. Whenever Tim Geithner or Ben Bernanke says "We've got all our money back," they're distracting you from the real point. These banks received short-term loans at 1.1%, instead of the prevailing 3.8%.

That means each bank received a gift of $27 million each - tax-free, no less - for every billion they received under that particular program.

We already knew that the banks have not been asked to write down any of the principal on underwater homes, even though their industry spent decades persuading homeowners that real estate was a foolproof investment - and even though they often hired adjusters who inflated the estimated value of those homes.

We now know that the American taxpayer was asked to rescue failing businesses without being given any of the concessions any other lender or investor would have been demanded -- like replacing the failed executives who ruined the enterprise, ending the practices that brought down the corporation (and the economy), or ensuring that the lender (who is also a customer) be treated fairly in all future business dealings.

We already knew that they've refused to refinance most homeowners, even though underwater homes are arguably more reliable than some of the collateral the Fed accepted when it rescued Wall Street. At the peak of the crisis it agreed to accept junk bonds and essentially worthless stocks in return for a trillion in loans - and tens of billions in giveaways.

We now know that the total amount of this secret bailout is $1.2 trillion - which, as Bloomberg's investigative journalists observe, is roughly the same amount that's owed on delinquent and foreclosed mortgages.

We already knew that the nation's homeowners owe banks between $750 billion and $1 trillion in loans for nonexistent home value, since that's the estimated difference between what people owe on their mortgages and what their homes are currently worth. Banks have never been asked to write down the principal for loans, even though they fueled the housing bubble and frequently knew (or should have known) that estimated home values were exaggerated.

We now know that Jamie Dimon's JPMorgan Chase received $48 billion in direct emergency loans, and that it also benefited from the $107.3 billion in loans given to Morgan Stanley. It did this while it was bragging about its "fortress balance sheet" and its financial invincibility - no less than 16 times, according to Bloomberg. We also know that it kept taking these loans a year later, which means it was lying when it said it took these loans merely to convince other banks to do the same, out of patriotic duty.

We already knew that Dimon and JPM made the same claim about the TARP funds they received, so that was a bogus claim too. And we also knew that Dimon has thrown public tantrums about the criticism directed toward his profession ("Bankers! Bankers! Bankers!") even though he knew about these loans.

We now know that the amount lent to these banks exceeded their total earnings for the entire decade!

We already knew that the Dodd/Frank bill did not reinstitute the Glass-Steagall Act and did not include a "too big to fail" provision.

We know now that, in the words of the Bloomberg report, "Even as the firms asserted in news releases or earnings that they had ample cash they drew Fed funding in secret, avoiding the stigma of weakness."

We already knew that there have been no indictments of senior Wall Street executives, despite abundant evidence of criminality, and that many cases of stock fraud have been settled with no convictions and relatively small cash settlements. Those settlements are paid by the very same investors who were defrauded, not by the executives who defrauded them.

We now know that America's banks, which were too mismanaged to receive credit from any reputable institution, received massive loans - even though the only collateral they provided was pretty much worthless at that point.

We already knew that these shaky enterprises depend on the kindness of strangers - in Washington and certain Attorney General's offices around the country - to protect them from the consequences of their own illegal behavior. That strategy's worked pretty well for them so far, to the detriment of the nation and the global economy.

_________________________________

As for what we don't know yet -- well, as Donald Rumsfeld said, there are the "known unknowns" and the "unknown unknowns." (Or whatever the hell he said -- you get the point.) Here are three "known unknowns":

Did JPMorgan Chase lie to investors when it bragged about its rock-solid balance sheet, or did it take emergency loans it didn't need in order to bilk the taxpayer?

It's a crime to lie to investors about your own balance sheets, so how many bankers committed stock fraud by taking these loans, failing to disclose them, and making false statements about their own bank's financial stability?

Why did the Federal Reserve and the government demand secrecy for these loans and fight so hard to prevent them from being exposed? If they wanted to maintain confidence in the banks and prevent a panic, have they decided where to draw the line between protecting the economy and deceiving the public? (f they have, they've drawn it in the wrong place.)

How much outrage is required before people demand rigorous bank reform, strong regulation, and criminal investigations?

I gotta tell ya - it's that last question that keeps me up at night.
___________________

We discussed this issue the other day on Thom Hartmann's "The Big Picture." The video is here.

That Secret Federal Reserve Bailout: A Conversation with Thom Hartmann [VIDEO]

Richard Eskow — Thu, 25 Aug 2011 14:30:24 -0400

The other day we had an interesting discussion of that secret Fed bailout on Thom Hartmann's TV program, The Big Picture. Here's the video.

Wisconsin Governor's Allies Ran a Toxic Bailout Bank - and Got Rich

Richard Eskow — Mon, 14 Mar 2011 11:17:01 -0400

People in Wisconsin are pulling their money out of Marshall & Ilsley (M&I) Bank because they know it's been helping their Governor's crusade against public employees and the middle class.

They might also like to know that M&I's executives ran one of the most conspicuous dumping sites for toxic financial waste in the country. And that the same executives are about to get very rich, even though TARP rules supposedly don't allow big bonuses for underwater bankers like the leadership at M&I.

These executives didn't just contribute to Scott Walker's campaign. They also helped the governor avoid the press - and his own constituents - by letting him use their bank's underground tunnel, which leads directly from its parking lot into the Capitol Building in Madison. Using it for this purpose may have been a violation of the bank's own Code of Business Ethics. [See UPDATE below]

That tunnel's not just a convenient way to help a political crony. It's also one heck of a metaphor.

The M&I Bank's behavior mirrored that of banks across the country who were rescued by the public, then used their money to lobby against the public interest. M&I executives have gone the extra mile for Scott Walker as he fights to strip employees of their benefits and cut vital services. Walker's goal is to keep taxes low for wealthy Wisconsin residents by cutting services for the middle class -- the same middle class that paid for M&Is bailout and keeps its money in M&I's vault.

And once again, these bankers will benefit personally from the public's sacrifice.

Toxic Avengers

M&I Bank had a dangerously high percentage of toxic assets - mostly crappy mortgages that aren't worth nearly what these bank executives claimed they were worth. There are only two ways bankers can accumulate so many bad loans: either by being, shall we say, morally elastic, or by being bad at the fundamentals of their profession. (Although, come to think of it, the two are not mutually exclusive.)

How toxic were M&I's loans? As Bloomberg News reported in 2009, "The biggest banks with nonperforming loans of at least 5 percent include Wisconsin's Marshall & Ilsley Corp. and Georgia's Synovus Financial Corp." Bloomberg quoted one former regulator as saying these figures were "off the charts," while another said: "If (a bank) is at 5 percent, chances are regulators have them classified as being in unsafe and unsound condition."

At its worst, M&I Bank's figure was 5.18%.

And yet investors might not have known the bank was in "unsafe and unsound" conditions by reading SEC filings for previous years. That document made it sound as if the bank was merely suffering from the difficult conditions everybody was facing. What's more, "management concluded that internal control over financial reporting was effective as of December 31, 2008."

The bank's most recent 10-K filing states that in 2009 "the Corporation continued to experience elevated levels of expenses due to the increase in operating costs associated with collection efforts and carrying nonperforming assets." That included, among other things, the cost of foreclosing on Wisconsin residents.

Some reports suggest that the bank's purchase was a "shotgun marriage" arranged by regulators who forced the Bank of Montreal to make the acquisition. The fact that this deal will make some sub-par bankers very rich and let them skirt TARP rules in the process didn't seem to concern these anonymous regulators at all. In fact, if the plan helps regulators get their TARP dollars back, a whole host of substandard executives at other regional banks may get rich too.

Money For Nothing

Every "toxic loan" represents a household whose life has become a shambles. The executives of Marshall & Ilsley Bank, on the other hand, are doing just fine. Thanks to a a legal workaround discovered by the enterprising folks at M&I, they're using a 2008 contractual provision to write themselves fat checks before taxpayers get their money back.

How fat are those checks? The CEO, Mark Furlong, is getting $18 million. CFO Gregory Smith is getting $5.5 million. Senior Vice President Kenneth Krei will receive the same amount, while Senior Vice Presidents Thomas Ellis and Thomas O'Neill are getting $4.1 million and $5.1 million, respectively, with another $26.7 million being distributed to other M&II executives (many of whom undoubtedly oversaw the writing of toxic loans).

If these underperforming executives gave back all this bonus money they'd be less than 1/25th of the way toward paying back the $1.5 billion that the bank still owes on its TARP money. ($1,543,261,806, to be precise.) That's not much of a dent, but it would be a nice good-faith gesture.

Tunnel of Love

Instead, a number of these executives have been using their money to back Scott Walker, lavishing more campaign cash on him than they gave to all other candidates put together. And they didn't just donate money. As Mary Bottari reported, the bank has been letting the Governor ferry himself and a number of his lobbyist friends to the Capitol through that underground tunnel. (Are they sure it doesn't lead to the River Styx?)

About that tunnel: In a section of M&I's Business Code of Ethics entitled "Protection and Proper Use of Company Assets," employees are told that "The resources of the Company should be used only for legitimate business purposes and for the benefit of the Company." The tunnel is clearly a "resource," and M&I has not reported its use as a lobbying activity. In fact, the bank's disclaiming any institutional involvement with Gov. Walker. So who violated the Code of Ethics?

The Code states that "Employees who violate the standards in this Code will be subject to disciplinary action, which depending on the severity of the situation, may include dismissal." We await the Bank's announcement of disciplinary action in the Scott Walker case.

You Got to Move

Now, as both Mary Bottari and Mike Elk have reported, the unions are striking back with a "Move Your Money" campaign. That could hurt since, as Mike Elk reports, a researcher estimates that unions may have more than $1 billion in pension funds invested at M&I Bank.

One on side of this conflict you have undeservedly rich bankers. On the other side you have teachers, firefighters, and cops. And the middle class is getting the short end of the stick, too. (See this video clip from Dave Johnson for a gut-level response from a Wisconsin farmer.)

In response to the protest, M&I issued a statement insisting that these donations from senior executives were the actions of individuals and not of the bank itself. But those individuals run the M&IBank. And they literally have an underground connection to Walker and the lobbyists who are running Wisconsin's state government.

Unless the Board of Directors is willing to replace these executives, their actions can reasonably be considered the Bank's actions as well. And if nobody's disciplined for for that tunnel, M&I can be considered an active collaborator in the Governor's actions.

Replacing these executives would be a good idea for M&I, too. They haven't been very good at their jobs. Fortunately for them, good performance isn't a prerequisite for getting rich in today's banking industry.

But really: A tunnel? What would Dr. Freud say? The people who are taking their money out of M&I Bank seem to think somebody's getting the shaft, and they want it to stop.
________________________

NOTE: You don't have to live in Wisconsin to join the Move Your Money fun! M & I also has branches in Arizona, Minnesota, Missouri, Kansas, Nevada, Florida, and Illinois. The Move Your Money website can help you make the switch.

UPDATE: Despite the report we cited, there is now some question about whether the tunnel leads from the bank's parking lot or from a public lot that's accessible to all, including state employees. We'll correct or amend as needed. In the meantime, we'll assume the bank and its executives did nothing wrong regarding the tunnel. (It's still a great metaphor, though.)

This post was produced as part of the Curbing Wall Street project.

Barney Frank and the Fed Bailout Fallacy

Zach Carter — Thu, 09 Dec 2010 10:05:49 -0500

Mike Stark has posted a provocative on-the-street interview with Barney Frank about the recently released Fed data. Frank offers what is now a standard defense of the Fed's bailout operations: Without them, the economy would have collapsed, so critics should just quit whining. But Frank takes this line a step further, accusing liberal Fed critics of playing into the hands of right-wingers who don't want to extend any economic relief to anybody for anything, ever. It's all hooey.

Here's Frank:

"On the whole, frankly, those who were looking for conspiracies and scandals were disappointed. I think the fact is, what you saw was a series of events that worked pretty well and helped the economy . . . . Would you have had the Fed do nothing? At a time when there was no credit available, would you have had the Fed do nothing? That's what the right-wing wants."

First, the "disappointed" critics line massages away the fact that the Fed failed to disclose an enormous amount of information. We still don't know the credit ratings of collateral accepted at some facilities, and we don't know the trading prices of securities they accepted as collateral at any of the facilities. Without that information, we can't determine whether many of these actions were scandalous.

Second, yes-- without major government intervention, the economy would indeed have collapsed. Really, the economy collapsed anyway—two years later unemployment is near double-digits—but it's safe to say the collapse would have been worse had the Fed failed to act. But just because the Fed had to do something doesn't mean it had to do exactly what it did. There were always other alternatives, and the most obvious would have involved attaching some strings to the bailout facilities.

If you want this money, you have to help homeowners avoid foreclosure, or your executives have to take a hike, or you all have to spend the next month wearing a shirt that reads, "I hijacked the U.S. economy and all I got was this lousy t-shirt." Just about anything to make clear that aid from the U.S. government came at a price would have been better than, well, nothing.

Frank spends a good deal of the discussion arguing that liberal Fed critics are catering to right-wing agendas:

"My friends on the liberal side shouldn't always focus on the negative. You're playing into the hands of the right-wing. You know, it's the right wing that thinks this is some terrible conspiracy. This was a case of government intervention. The Federal Reserve is a government entity. It intervened substantially to stave off worse damage than we would have gotten, and I think it's a great mistake for people on the liberal side to engage in this kind of Fed-bashing."

The Fed had extraordinary powers and was not faced with the choice of whether to intervene, but of how to intervene. I fail to see what is so ultraconservative about objecting to free money for fabulously wealthy criminals/fools who wrecked the economy with predatory loans.

Indeed, it seems to me that the ideological pressure here is really on Frank's shoulders. When a traditional liberal icon like Frank endorses a bankers-and-brokers-first policy, the public starts to believe that all Democratic policies are just handouts for Wall Street. This was the biggest reason why voters abandoned Democrats at the polls last month. The stimulus and the bailout were all mushed together in peoples' minds.

But things get really interesting when Stark proposes cutting checks to individuals instead of making loans to the banks. Frank responds:

"You understand how fallacious that is because the money was paid back . . . You acknowledge the money was paid back. Doing what you're suggesting, cutting everybody a check, they wouldn't have paid the money back . . . You're saying instead of lending the banks money, why don't we give it to individuals? Because then you would have had that much more deficit!"

Frank gets the best of this argument because Stark proposes cutting checks instead of making loans. But what if the Fed had offered everyone in the country a loan at zero or near-zero percent interest, on the condition that individuals put up sufficient collateral? This is a (very) charitable way of describing what the Fed did to support the banking system. If the same courtesy had been extended to individuals, I'm sure plenty of people would have defaulted. But certainly not everybody-- zero percent loans are actually pretty easy to pay back. And for those people who did in fact default, the Fed could have simply held onto the collateral to avoid taking a loss.

It's not obvious that this policy ends up working wonders—plenty of people would have been unable to post collateral, and for many who could, the risk of losing the lawnmower in order to pay the heating bill for another couple of months isn't really a great deal. There's no way to gauge whether the additional spending generated could have brought the unemployment rate down very much. And of course, personal loans wouldn't have helped debt-burdened homeowners very much. But then again, neither did any of the policies the Fed actually implemented!

And it is obvious that the government wouldn't end up taking a big loss on a big direct-lending-to-actual-people policy. As a result, crowing about the government turning a profit on the Fed's bailout facilities is really very silly. That doesn't stop Frank from doing it, however:

"It came back with interest! . . . The Fed is making money off that."

In short, you don't have to endorse Michelle-Bachmann-dystopia to object to the Fed's bailouts. Watch the whole thing:

The Fed Lied About Wall Street

Zach Carter — Thu, 02 Dec 2010 17:09:24 -0500

The data from the Federal Reserve audit is full of frightening revelations about U.S. economic policy and those who implement it. When Wall Street went off the rails in the fall of 2008, policymakers told the public we had a certain kind of problem, knowing all along that the actual nature of the problem was very different—and far more severe. This was a terribly destructive lie. Had policymakers fully explained the scope of Wall Street’s 2008 troubles, today’s problems with foreclosure fraud would simply not exist.

Here’s the basic issue. As Lehman Brothers, AIG and other major financial firms teetered on the verge of collapse, the Fed and the Treasury Department insisted that the trouble on Wall Street was one of “liquidity.” That’s a finance term meaning, “the banks are fine, but everybody is confused.” Banks have lots of money in long-term assets, but can’t convert those long-term assets into short-term cash.

In retrospect, that view was clearly an error. The bank held hundreds of billions of dollars worth of subprime mortgage assets, which were not merely worthless in the panic-stricken view of the financial mob, but worthless, full stop. At the time many people argued that the financial system faced not a liquidity crisis, but a liquidity crisis and a solvency crisis. That is to say, even if the government had helped the banks deal with day-to-day problems, the banks were still fundamentally unable to pay their debts. They were not merely illiquid, but insolvent.

I stole this perspective on the financial crisis from Mike Konczal, and the same basic framework was portrayed very forcefully by Nobel Prize-winning economist Paul Krugman in 2008 and 2009. Krugman’s major concern was that the U.S. would end up with a handful of dominant “zombie banks”—firms which were kept alive by government aid, but which were fundamentally insolvent, and unable to support the economy with productive lending.

The truth has been far worse than Krugman predicted. Not only are today’s major banks unable to support the economy, they are actively sabotaging the middle class with fraudulent foreclosures. This is a direct result of policymakers’ failure to address the fundamental solvency problem in 2008 and 2009. And what’s worse, it appears that the Federal Reserve was aware of the solvency problem, even as its top officials publicly insisted that the bailed out banks were fine.

To fix a liquidity crisis, the Fed has had a longstanding policy of offering short-term, low interest loans. In exchange for these loans, the Fed demands high-quality collateral. That’s as it should be: if a bank is truly experiencing a liquidity crisis, there is a public interest in keeping it afloat so it can meet its financial obligations.

And so in 2007 and 2008, the Fed created several facilities to ease liquidity based on this principle. The trouble is, starting on Sept. 15, 2008—right when Lehman Brothers was going under—the Fed started accepting total garbage as collateral for its loans. Not just a little bit of garbage, either. According to data released by the Fed yesterday, the central bank accepted $1.32 trillion in collateral rated “junk bond” status or lower, starting Sept. 15, through it Primary Dealer Credit Facility alone. That compares to $8.95 trillion in total loans extended through the Primary Dealer outlet from March 2008 through May 2009. From Sept. 15 onward, the Fed lend out $7.60 trillion through this window alone, meaning that a full 17 percent of its lending from this point was backed by junk bonds, or worse.

These total figures are somewhat exaggerated—the facility in question offered overnight loans, and many banks chose to roll-over their loans from one day to the next. Nevertheless, the collateral comparison is apt. However you measure it, nearly one-fifth of the Fed’s lending through this facility was backed by junk bonds.

What does all this mean? The Fed knew it was facing a solvency crisis, even as it publicly insisted that Wall Street was merely dealing with a liquidity issue. If the Fed had truly believed Wall Street only faced liquidity troubles, it would not have allowed major banks to pledge junk bonds as collateral for loans. And indeed, for months, the Fed did not allow banks to put up junk bonds as loans. But things changed when Lehman Brothers went under.

The Fed and the Treasury had to do something in the fall of 2008. But to fix liquidity without fixing solvency was a grave error. By denying the solvency crisis, major bank executives who had run their companies into the ground were allowed to keep their jobs, and shareholders who had placed bad bets on their firms were allowed to collect government largesse, as bloated bonuses began paying out soon after.

But the banks themselves still faced a capital shortage, and were only kept above those critical capital thresholds because federal regulators were willing to look the other way, letting banks account for obvious losses as if they were profitable assets.

So based on the Fed audit data, it’s hard to conclude that Fed Chairman Ben Bernanke was telling the truth when he told Congress on March 3, 2009, that there were no zombie banks in the United States.

“I don’t think that any major U.S. bank is currently a zombie institution,” Bernanke said.

As Bernanke spoke those words banks had been pledging junk bonds as collateral under Fed facilities for several months. From March 4, 2009 through May 12, 2009, when the Fed data stops, only two institutions borrowed money from the Fed’s Primary Dealer window: Bank of American and Citigroup. They borrowed almost every day, pledging junk bonds as collateral. Bernanke either knew this, or should have known it as a major public official.

This is the heart of today’s foreclosure fraud crisis. Banks are foreclosing on untold numbers of families who have never missed a payment, because rushing to foreclosure generates lucrative fees for the banks, whatever the costs to families and investors. This is, in fact, far worse than what Paul Krugman predicted. Not only are zombie banks failing to support the economy, they are actively sabotaging it with fraud in order to make up for their capital shortages. Meanwhile, regulators are aggressively looking the other way.

The Fed had to fix liquidity in 2008. That was its job. But as major banks went insolvent, the Fed and Treasury had a responsibility to fix that solvency issue—even though that meant requiring shareholders and executives to live up to losses. Instead, as the Fed audit tells us, policymakers knowingly ignored the real problem, pushing losses onto the American middle class in the process.

Ben Bernanke and Conservative Economic Sabotage

Zach Carter — Tue, 23 Nov 2010 16:01:39 -0500

The Republican Party's newfound political assault on Ben Bernanke is a grim reminder of the actual conservative economic agenda for the next two years. The midterm elections taught Republicans a destructive lesson: With Democrats in power, the worse the economy gets, the better Republicans do at the voting booth. Economic sabotage is the essential Republican strategy for winning the White House in 2012. They will block every effort to actually improve the economy they can, and make a big show out of criticizing any economic aid they can't block.

The Party's hypocrisy on the economy has been clear for months. They scream about the deficit when a few billion dollars worth of unemployment benefits are at stake, but deficit worries disappear when the $700 billion in Bush tax cuts for the rich are under discussion. When they do muster an economic defense of the Bush regime, it's the line that a recession is no time to raise taxes. This is a fundamentally Keynesian argument—a bad Keynesian argument, but Keynes through and through. And it's the same argument Republicans and conservative pundits deployed to enact the Bush tax cuts back in 2001 and 2003. It's a bad argument because tax cuts aren't particularly effective at stimulating the economy, especially when they target the rich. Unemployment benefits, in fact, would be a staggeringly more efficient mechanism, as former John McCain adviser Mark Zandi has repeatedly detailed.

Which brings us to Ben Bernanke, the most conservative candidate that President Barack Obama could possibly have appointed to head the Federal Reserve. The current Republican uproar against Bernanke shields the fact that he is, in fact, a Republican himself. He was a top economic adviser to President George W. Bush, who appointed Bernanke to the Fed's Board of Governors and eventually to Fed Chairman post. When Obama reappointed him to the job, a handful of Republicans objected on the grounds that Bernanke had approved generous bailouts of financial firms. Nevertheless, a majority of Senate Republicans still voted to reconfirm him—making his reappointment the most popular decision that Obama has made among Republicans. Republicans got their man, and they let him through.

But now Bernanke is taking a beating from conservative pundits and Republican politicians for the Fed's latest round of "quantitative easing." It's not just coming from the crazies, either. Even relatively milquetoast Senators like Bob Corker of Tennessee have threatened to strip the Fed of its mandate to promote full employment. Don't worry about whether people actually have jobs, you nervous Fed ninnies. Just focus on inflation, whatever the economic cost.

The timing of this argument is particularly instructive, since, right now, we are not experiencing inflation. We are, in fact, dangerously close to deflation, as rampant foreclosures continue to drive down home values.

But the Republican assault is not an attempt to fix the economy or even say intelligible things about the economy. It's straightforward political payback. Bernanke is directly contradicting the Republican midterm message, exposing the Republican anti-spending mantra as an economic disaster, and Republicans aren't going to stand for it.

Republicans just convinced a lot of voters that socialist intergenerational thief Barack Obama caused high unemployment with his budget busting economic stimulus. Government spending is the villain-- not the Wall Street excess or predatory lending that Republicans shepherded for eight consecutive years, not even the generous bank bailouts that Republicans approved.

But last week, Bernanke gave a speech emphasizing that the Fed's actions to revive the economy require Congressional help. Quantitative easing is basically an interest-free credit card for the U.S. government, allowing it to borrow money at negative real interest rates in order to spend that money on job-creation efforts. Since already record-low interest rates on Treasury bonds haven't been enough to convince congress that now is the time to borrow and spend, the Fed is driving those rates even lower. But for this credit card to work, Congress has to use it. It has to enact further economic stimulus, spending money to create jobs.

This kind of talk makes Congressional Republicans look stupid. Now it's not just Barack Obama and his anti-colonialist father who support government spending to boost the economy, it's a very high-profile Republican economist, too. Obama can't be a radical socialist when top-ranking Republicans agree with him. And God forbid that Bernanke's recent statements actually create pressure for Congress to do something about jobs. Lowering unemployment means reelecting Obama.

None of this is to say that Bernanke is some kind of liberal savior, or even a particularly good Fed Chairman. He oversaw bailouts that could have been much more effectively designed, to say the least, and he has not been open about those packages with Congress or the public. He's resisted calls for Fed transparency and waged misleading attacks on financial reform legislation.

But he isn't toeing the Republican Party line on Big Bad Government Spending. And Republicans are going to keep hammering him until he does.

Obama's Top Priority Must Be Jobs, Not Republican Appeasement

Zach Carter — Wed, 03 Nov 2010 12:08:31 -0400

Economic policy has faced grave challenges over the past two years, hamstrung by obstructionist Republicans in the U.S. Senate and Wall Street-friendly advisers in the Obama administration. With the Republican Party now in control of the House, it seems certain that any major action to create jobs will face tremendous obstacles. This is a global calamity. But the political lesson of the past two years should be clear: all the good PR in the world can't whitewash a terrible economy. For the next two years, President Obama and his Congressional allies must do everything they can to actually improve the job market. Without a better economy for ordinary Americans, Democrats are doomed in 2012.

Ezra Klein presents what he thinks is a rosy view of how policy could proceed after last night. To me, it looks like exactly the sort of empty political gesture that Democrats should be fighting. Ezra envisions Obama and new House Speaker John Boehner, R-Ohio, reaching a grand bargain on economic policy: the payroll tax is lifted for a year, $50 billion in infrastructure spending is approved, the unspent 2009 stimulus money is abandoned, and $400 billion in spending cuts over 10 years are approved.

Ezra calls this the next chapter in an imaginary "universe where the government works." It's more like the next chapter in an imaginary world where the government works, and every policymaker is completely insane. Sure, the deal would convince voters that Democrats and Republicans can pass legislation (if it passed). But the result would be a neutral to negative impact on the job market. Continuing today's avoidable economic suffering is bad enough in its own right, but it's also a political disaster for Democrats.

If Obama heads into 2012 with double-digit unemployment, he will lose. End of story. Voters have a terrible view of Republicans, and they just sent over 60 new Republicans to Washington because Obama didn't bring down the unemployment rate. Those results prove that Democrats' backs are already up against the wall on 2012. Fixing the economy takes time, and we need strong, serious action as soon as possible, or we are headed for political calamity.

Why won't Ezra's policy package work? It has two useful elements—a tax cut to hire more workers, and $50 billion in infrastructure spending. Both of these would help some—if the tax cut was really wildly effective, they might combine to take the unemployment rate down by half a percentage point. But these useful policies would be offset by other spending cuts. And unless we're only cutting $600 hammers in the Pentagon budget, those spending cuts are going to kill jobs. To get $400 billion in cuts, we'd have to find 667 million of those hammers.

Lifting the payroll tax really might help create jobs. We don't know how many, but it surely wouldn't be as effective as simply hiring people outright, and that's what government spending—"stimulus" or otherwise—does. In other words, Ezra has outlined a proposal to kill jobs in order to maybe create some.

Showing that they can work with Republicans won't save Democrats in 2012. Only real economic results will. Aggressive PR about how you really actually did fix things won't convince people who are out of a job or in foreclosure. They know the economy still sucks, and even worse, they know you're not telling the truth.

So Obama also has to get his messaging in order. It may very well prove to be the case that Republicans block all but the most modest of steps to create jobs. Obama can't pretend that these steps are enough, and he cannot hesitate to attack Republicans, holding out hope that maybe, someday they will magically come to their senses and start approving policies that promote growth. He can't keep repeating the Republican talking points Rahm Emmanuel fed him over the past two years—the government can create jobs. Right now, it's the only entity that can.

Getting past "partisanship" doesn't mean cutting whatever crappy deal you can with your political adversaries. It means eschewing political grandstanding for good policy. Without good policy, bipartisanship is a pyrrhic victory.

So Obama has to fight hard for policies that actually bring the unemployment rate down, and he must be willing to defend his policy proposals from Republican attacks, making a clear moral case for why spending to support jobs is a good idea. Republicans know that they can win the White House in 2012 by simply blocking Obama and letting the economy fall apart. They'll do it. They already have. Obama has to hold Republicans rhetorically accountable so they fear the electoral consequences of obstruction enough to vote in favor of policies that actually work.

If Republicans refuse to cooperate, Democrats must at least demonstrate to voters that they are working for voters, not for bigwig bankers. The stimulus package approved in 2009 was too small for a variety of reasons, but one of them was due to the fact that Larry Summers and Timothy Geithner expected the financial system to help revive the economy. It didn't, because the system is dominated by too-big-to-fail behemoths with massive losses embedded in their balance sheets.

It's been very fashionable in D.C. to say that the bank bailouts "worked," even though they were unpopular. But they didn't work—banks aren't lending. And they didn't work because banks are still saddled with hundreds of billions of dollars worth of lousy assets. Regulators are allowing banks to account for those assets at inflated values, which protects the banks from losses. So banks trade securities instead of lending, and slowly recognize losses as they rake in gambling profits. This is why the foreclosure fraud scandal has sent bank stock prices on a downward trend—investors know that enough documentation will spark a new wave of losses, causing big trouble for Wall Street.

So we still need to fix the financial system. Banks must be forced to recognize their losses. Where those losses render a bank insolvent, the bank has to be restructured—shareholders wiped out, creditors taking a hit, and taxpayers putting up money only where doing so prevents a cascade of defaults. This will be painful, but no more painful than watching a recovery without credit.

And if Obama can't get these policies, he needs to at least fight for them. Prosecute the deep fraud in the financial system that is being uncovered every day. Explain to voters that Republicans are blocking job-creation.

These policies will be extremely difficult to secure in the face of anything close to the Republican obstruction we've seen over the past two years. But Democrats simply have no other choice. Without major action on the economy very soon, the White House is already gone.

AIG Redux: Wall Street Presses Regulators To Repeal New Derivatives Rules

Zach Carter — Thu, 28 Oct 2010 09:47:05 -0400

It's been pretty well-documented that the ultimate fate of Wall Street reform will depend on a series of highly technical proceedings at federal regulatory agencies. If regulators adopt tough new rules, the financial overhaul could succeed well beyond the expectations of optimistic reformers. But there is a very real danger that banks will be able to roll regulators during these quiet and technical affairs, without any real public oversight. One of the most important areas to watch are the rules surrounding derivatives—the shadowy market that brought down AIG. The battle is already under way, and the bank lobby isn't pulling its punches.

Wall Street reform basically did two things unquestionably well. It created a new Consumer Financial Protection Bureau to curb bank abuses, and it reined in the derivatives market, which is currently a hotbed for fraud, abuse and systemic risk. There are dozens of smaller-bore accomplishments in the Dodd-Frank bill, but derivatives and the CFPB are the two major wins.

Take a look at this 7-page letter from The American Bankers Association—the bank lobby—and this 10-page letter from the International Swaps and Derivatives Association (ISDA)—another Wall Street lobby group. See if you can spot where they regulators to completely erase the legislative progress on derivatives.

You probably can't-- unless you're a bank lobbyist, a finance lawyer or a nerdy blogger. And the bank lobby loves it that way, because there are only a few nerdy bloggers out there, even fewer financially literate mainstream reporters, and hundreds and hundreds of bank lobbyists. Here are the critical passages from page 6 of the ISDA letter, and page 4 of the ABA letter. I'll explain why it's so destructive below. ISDA:

Financial" risks are "commercial risks." The dictionary definition of "commercial" is "of, pertaining to, or characteristic of commerce." The term "commercial risk" should be defined against this background.

ABA:

It is very important for our members that the term "commercial risk" be interpreted broadly enough to include financial risk for depository institutions.

In the years leading up to the financial crash of 2008, banks could trade complex derivatives completely in the dark. If Goldman Sachs wanted to make a deal with AIG, all they had to do was make a phone call (or just as frequently, type out an AOL instant message). No government regulator looked at this trade, and nobody in the market evaluated whether either party could possibly make good on it.

And so AIG built up literally trillions of dollars in exposure to the housing market by betting money it didn't have with big Wall Street banks. And banks, eager to dump the risks posed by crappy mortgages onto AIG, didn't bother to figure out if AIG could ever possibly make good on all of its derivatives contracts.

Ultimately, AIG got burned badly, and the banks came crying to Washington for help. The Federal Reserve acquiesced, and funneled billions of dollars to AIG, which in turn went directly to major banks—most notably Goldman, which scored $12 billion from the first round of payments alone.

One way to fix this problem is to give the market some scrutiny over derivatives trading—the same kind of scrutiny it has over ordinary stock trades. This is a minimum step—as we've seen with flash crashes and naked short sales, market scrutiny isn't a guarantee against fraud, abuse or excess. But it's a lot better than nothing.

So the Wall Street reform legislation required all derivatives contracts to be traded through what's known as a "central clearinghouse." This is basically a third company that serves as an intermediary between the two firms that want to trade—the way the New York Stock Exchange stands between two companies trading a stock.

When Goldman calls up AIG, the clearinghouse forces both companies to post margin on the trade, verifies their ability to make good on it, and agrees to foot the bill of one party can't pony up.

But the big banks, operating primarily through the U.S. Chamber of Commerce, were able to carve-out a big loophole in this process. Surely not every trade needed to be centrally cleared, they argued. Plenty of farmers and manufacturers ink derivatives contracts in order to insure themselves against ordinary, non-financial commercial business risks. If a farmer is worried that the price of wheat might go up or down, he can go to JPMorgan Chase and ink a trade. The farmer pays JPMorgan a few dollars every month, and if the price of wheat goes too high or too low, JPMorgan agrees to pay the difference to the farmer. We don't want to punish poor farmers for excesses committed on Wall Street.

This argument was always stupid for lots of reasons, but it ultimately won the day. "End-users" like airlines and farmers that wanted to hedge "commercial risks" were not required to trade through a clearinghouse.

Fast forward to September 20, and the bank lobby is trying to pull a fast one by redefining the word "commercial." The bank lobby is trying to convince regulators that the business risks of financial institutions—banks, hedge funds and companies like AIG—ought to count as "commercial risks." If the bank lobby succeeds, they'll allow all kinds of huge financial firms to keep their derivatives trading in the dark, and leave the economy open to another AIG-style calamity.

That would directly benefit major Wall Street banks like Goldman Sachs, JPMorgan Chase and Bank of America. Remember, it's not just the farmer who avoids the clearinghouse when she hedges a "commercial" risk—it's the trade itself. That means that the bank on the other side of the trade gets to deal off the grid, as well. So long as the too-big-to-fail Wall Street banks conduct their riskiest, most abusive deals with hedge funds, insurance companies or anybody except another too-big-to-fail Wall Street bank, they could keep their trading totally secret. That is exactly what happened with AIG, and with these two letters, the bank lobby is pressuring regulators to maintain that status quo. If the TBTF derivatives dealers get into trouble again, after all, they can always come to taxpayers for a bailout, just as they did with AIG.

So there you have it. A full 900 words of blogging to explain why a single word in a letter from bank lobbyists threatened to undo one of the most significant accomplishments from the Wall Street reform bill.

There are literally hundreds of rules like this coming. And Republicans are already vowing to hamstring regulators if they gain control of the House next year.

Bankers Broke The Economy And Got Rich Doing It

Zach Carter — Fri, 01 Oct 2010 14:38:47 -0400

Today’s absurd William Cohan column actually argues that we don’t need consumer protections in banking—nevermind the subprime explosion, the $8 trillion dollar housing bubble or the 1.2 million foreclosures expected this year. Nevermind the $38 billion in overdraft fees the banking industry reaped in 2009, or the ridiculous fine-print on credit cards. Nope, in William Cohan’s crazy world, the mortgage crisis was basically a problem caused by idiot consumers who—according to Cohan-- don’t even deserve basic legal protections.

Cohan makes only two real points in his column, both of them profoundly stupid. The silliest objection is his obviously disingenuous sticker-shock at the $500-million-a-year budget the new Consumer Financial Protection Bureau will have:

“In an era of huge budget deficits and a depleted treasury, that’s a lot of money for taxpayers to fork over every year to support a new government bureaucracy designed to protect us from our own worst impulses.”

Nobody who knows anything about budgets could be appalled by this number. Even by the standards of government bureaucracy, the CFPB’s funding is paltry. It’s only 10% of the Fed’s annual budget, and about half of the SEC’s. Eliminating or quintupling the CFPB’s funding would be totally insignificant to the overall federal budget. But even if this number did matter, Cohan’s analysis is preposterously short-sighted.

Employing a police force seems like a waste of taxpayer dollars until you get robbed, and so it is with financial regulation. Right now the U.S. economy struggling through a horrible recession, which has included significant government expenditures to bailout Wall Street and keep the job market afloat. All of this was caused by a predatory lending binge financed and implemented by Wall Street. Decent consumer protections would have prevented the housing bubble from getting totally out of control, and would have prevented Wall Street from destroying itself. If it costs us $500 million a year to save 8 million jobs, $8 trillion in household wealth, and $4 trillion in bailout money, that seems like a pretty good deal to me.

This budgetary argument holds no matter who is responsible for the mortgage crisis, be they banks or borrowers, predatory or pristine. But Cohan doubles down on his idiocy, saying that actually, borrowers don’t deserve to be protected from predatory banks.

Like virtually every senseless diatribe against the CFPB written over the past two years, this attack isn’t directed against the CFPB itself, but against the very idea of consumer protection—something that has been a common-sense element of bank regulation for centuries. Things got off track over the past thirty years (with accelerating aggressiveness during the Bush years) as bank regulators simply stopped enforcing consumer protection laws.

The CFPB does not create some wild new standard of regulation—it’s just an effort to ensure that somebody actually enforces the basic consumer protection mandate that existing regulators have ignored. The existing regulators failed, because they’re more worried about short-term bank profitability—the more money a bank makes, the less likely it is to fail, and the less likely that the regulator will be embarrassed by a disastrous bank failure. To existing agencies, it doesn’t matter where that profitability comes from—if it’s from predatory lending, they’ll just look the other way. The CFPB breaks this perverse incentive structure by establishing an agency that only works with consumer protection issues—not bank profitability.

Cohan waits until the final paragraph of his column to deliver the “evidence” for why we don’t need a CFPB, and he gets it completely, horribly wrong.

“Yes, some people who have lost their homes were victims of fraudulent mortgage brokers and shady lenders. But the vast majority of those who held the billions of dollars in mortgages now foreclosed on knew exactly what they were doing. And one of the dirty little secrets of the financial crisis is that one homeowner after another signed mortgage-loan documents that were filled with inaccurate information about his or her net worth, assets, salaries and ability to make monthly mortgage payments. Why would someone sign a loan document knowing full well the information on it was inaccurate and the mortgage could never be repaid?”

The only real statistic on mortgage fraud comes from the FBI, and it doesn’t back up Cohan’s claims at all. As early as 2004, the FBI was warning about an “epidemic” in mortgage fraud—not a few bad apples, not “some people,” but an epidemic . We know that mortgage fraud was standard operating procedure at Washington Mutual, now part of JPMorgan Chase, and they weren’t alone—for five years, rampantfraud was a basic component of the U.S. mortgage machine. And according to the FBI, 80 percent—repeat, 80 percent—of this fraud was perpetrated by the lender.

So, let’s answer Cohan’s question. Why would people knowingly set themselves up for foreclosure? They wouldn’t! The key incentives for fraud and deception do not apply to rational borrowers who want to live in their homes. They apply to lenders, who were being paid very well to push borrowers into unaffordable mortgages. Bankers and brokers were paid kickbacks to steer borrowers into subprime loans, when those same borrowers would have qualified for ordinary mortgages. With heavy demand for mortgage-backed securities on Wall Street, banks knew they could issue garbage loans and stick other investors with the tab—so they did. The list of lenders who pawned their crappy loans off onto other people includes many of the biggest names in finance: Wells Fargo, Wachovia, Citigroup Bank of America, Countrywide, Washington Mutual and more. Banks stood to make a lot of money from fraud. Borrowers, by contrast, could count on foreclosure. Who do you think is going to falsify the income on loan applications?

Sure, there were borrowers who tried to game the system. But the story of mortgage fraud in the housing bubble is overwhelmingly a story of malpractice by bonus-crazed bankers, not borrowers. We need Elizabeth Warren and the CFPB to protect our economy from such abuses. This is a question of basic law enforcement, something Cohan apparently believes should not apply to ordinary citizens looking to buy a home.