Tuesday, July 20, 2010

C-Span Kabuki Theatre: HUGE Unreported Bank Losses Hidden - Don't Let Goldman Be Goldman & Not Too-Big-To-Fail, Just Too-Connected & Liz Warren Fail

I was wondering when anyone would comment on the obvious. Someone has. Now, is anyone else noticing? Or reacting with the interests of the citizens considered? From Stellaa:

. . . there seems to be a ritual. The accused, usually a corporate wrongdoer, is brought up for a scolding. A public, televised , filled with populist talk and drama scolding.

The Senators/Representatives, take turns kicking the executives in the butt. Yet, I never see the politicians return or, reject contributions from the particular corporation or, industry.

Lets look at Goldman Sachs and the Senatorial Finance Committee. It's not hard, the Center For Responsive Politics, has a great interactive site, Open Secrets, that will answer all your questions: Goldman Sach's Congressional Inquisitors Also Beneficiaries of Firms Financial Largesse.

The committee's 10 senators have together received more than a half-million dollars in total campaign contributions from a combination of Goldman Sachs' political action committee and its employees and their families, research by the Center for Responsive Politics indicates. Top recipients include John McCain (R-Ariz.), Susan Collins (R-Maine) and Tom Carper (D-Del).

Consider this, the people who will make the decision on how to regulate, or to investigate the finance industry, just in the Senate, were paid $500,000.

The Executives are run through a gauntlet in the hearing. Prepared to look repentant and chastised by firms that specialize in this process. We had the Auto Industry, Toyota got it's own show, Bankers, Mortgage Bankers, you name the industry, we have had the show. Cadres of lawyers and public relations experts, advising them on what they will take blame for and what they will apologize for and how. What they will wear, how they will look. Oh, I want one of those contracts.

The Senators/Representatives, take turns castigating the executives and defending the people. Accusations and references to common tropes, gambling, criminality etc. are raised. We are fed bits and pieces. The executives go on interviews to further seem repentant and apologetic. Even on NPR, go figure. Heads down. Some people, probably a lot of people feel sorry for them and they believe their remorse.

Business as usual when the cameras leave the hearing rooms. Money is exchanged. Deals are made. The entertaining and the parties go on as nothing happened. In the end, we are the chumps.

The only price is that at some point, the executives will have to be taken behind, or I should say, in front of the shed for a spanking.

Since 1990, Goldman Sachs has paid $31.6 million to our politicians, 64% to the Democrats and 36% to the Republicans. Have you seen anyone return the money? Have you seen anyone come out and say: I will not take any money. Even as a gesture. A symbol.

And it certainly is shitty. To quote a noted Senator. From a former Goldman VP (emphasis marks added - Ed.):

DON’T Let Goldman Be Goldman

Wallace C. Turbeville Is it fair to single out Goldman in a sea of financial wrongdoing? Absolutely, says Wallace Turbeville, a former Goldman VP. William D. Cohan’s op-ed piece in the July 7th New York Times had the same title as this article, but for the word “Don’t.” At first glance, I thought the Times piece might be a report on New Age self actualization for investment banks. But the title suggests something more troubling. The whole point of financial reform is that Goldman (and the others) should no longer be permitted to be Goldman. A return to business as usual is the last thing we need. Mr. Cohan is a student of Goldman, but he profoundly misreads the firm’s role in the Wagnerian drama we know as “The Great Recession.” He begins by imploring us all to “fess up” to the fact that financial reform would have been impossible had the Administration and Congress not “demonized” Goldman. “Demonization” is a popular word in today’s political discourse. It suggests unfairness. Mr. Cohan does not dispute the facts asserted by the Administration and Congress. Instead, he points out that underlying ethical flaws were shared throughout Wall Street. They arose from the shift toward a business model that rewards taking imprudent risks with other people’s money. Mr. Cohan says that “Goldman Sachs did nothing differently in the years leading up to the crisis than did other firms of its stature.” Anyone who has raised a child is familiar with a common excuse for bad behavior. The proper response to “Everyone else is doing it” is a stern demeanor and the answer: “Maybe, but so what?” But let’s give the article a generous interpretation. While the casual reader might interpret the shared lapse in ethics as an excuse, perhaps it is not intended to be read this way. We will assume that Mr. Cohan intended not to excuse Goldman but to find fault with political leaders who unfairly singled out the firm. It seems obvious that the example of a single firm is a more effective rhetorical device than calling out generalized bad behavior. Politicians used this device and public opinion was successfully mobilized. The job got done. I believe that the public understood that the bad behavior was widespread, and that Goldman was merely one example. Was it unfair to make Goldman the example? The article argues that Goldman was just like all the other firms. It was not. Goldman was actually better at executing a certain investment banking business model than anyone else. It became a leader in the industry, admired by competitors, the media and politicians. The problem was that the business model, so effectively executed by Goldman, turned out to be bad for America. The model inherently risks the survival of critically important institutions. It is also nearly impossible to use the model and, at the same time, maintain business ethics conforming to the shared values of the society. Goldman historically promoted its commitment to ethics when soliciting clients. I am convinced that Goldman people genuinely believed this commitment to be true. It may even be the case that ethics were taken more seriously at Goldman than at its competitors. But seeking business based on ethics carries with it a responsibility. Pursuit of a business model with inherent ethical challenges has consequences that are unavoidable, especially to a firm which has held itself out to clients as particularly ethical. Goldman’s success was envied up and down Wall Street. The pressure to keep pace with Goldman’s earnings drove other firms to emulate its model. At a minimum, managers at other banks were driven to take greater risks hoping for greater rewards as proof to shareholders that they measured up to the Goldman team. It is ironic that Goldman was first to foresee risks of a deteriorating market and acted to defend itself. Goldman’s aggressive preparations, including the extraordinary demands to AIG for collateral, may have actually contributed to the intensity of the panic. Goldman was so prepared that, when the tsunami finally hit, the only real threat to it was a total systemic collapse.

Congress and the Fed stepped in with cash to avoid catastrophe and Goldman, now even more powerful compared with competitors, immediately prospered. The real irony is that Goldman was greatly responsible for the problematic business model; yet, because management pulled the plug so effectively, the value of the bailout to Goldman shareholders was disproportionately large. Mr. Cohan suggests that it was unfair to use Goldman as an example because of its relative ethics and its effective response to the danger. Those points may be relevant if the real issues were incompetence and larcenous intent. Instead, the core concern was and is the dysfunctional business model that generated massive profits for the firms but devastated the society. Goldman was not just like all of the others. It was the leader. Becoming the leader involves a trade that should be well understood at the highest levels of Wall Street. Investment bankers often engage in businesses with underdeveloped rules of conduct. Pushing the envelope may be risky, but the rewards are more than worth it. If a firm is a leader, its profits and the wealth and power of its managers are virtually limitless. If it turns out that the business has consequences to society that are intolerable, even if the consequences were unforeseen, the leader will be the example held out to the public. Management is held to a high standard, but the pay scale more than reflects the level of difficulty.

Is this an unfair trade? I don’t think so.

Finally, Mr. Cohan concludes that we should “lay off the firm and allow Goldman and the rest of Wall Street to return to some semblance of normalcy.” Besides unfairly demeaning the entire financial reform effort, this statement suggests that our problems have been solved.

In fact, it would be a monumental error if financial reform ends with the passage of the legislation this month. James K. Galbraith points out in testimony to the Commission on Deficit Reduction that focusing on Medicare and Social Security as a means to reducing deficits is misguided.

Economic growth is the only sensible solution. He cites the need to restore the financial sector’s role of capital formation for productive purposes, i.e., commercial lending and equity investment. The current legislation focuses on curbing dangerous behaviors and on procedures to deal with financial panics. It does not reconnect Wall Street capital to the engine of economic growth: productive and innovative businesses which employ American workers.

No one wants to drive Wall Street out of business, certainly not politicians whose campaigns rely on it as a source of funds. But the economy will not prosper unless Wall Street reengages with the broader economy. Current bankers will keep their Hamptons estates under the new regulations. But their successors may not be able to afford mansions if 10-20% unemployment is the new American reality. Wall Street’s attention must turn away from churning derivatives on existing products and instruments and toward growth of the economy and jobs. If more government intervention is needed to force this turn, so be it. Neither the public nor its political representatives should feel regret if this means Goldman and the other banks must fundamentally change.

Wallace C. Turbeville is the former CEO of VMAC LLC and a former Vice President of Goldman, Sachs & Co.

And, of course, they were never "Too Big To Fail," only "Too Connected To Fail." (Emphasis marks added - Ed.)
FinReg Achilles’ Heel: Not Too-Big-To-Fail, But Too-Connected-To-Fail

Henry Liu demonstrates why FinReg, however well designed, cannot be counted upon to prevent future market failures.

A rule of finance: All trading models buy safety by externalizing risk to the trading system.

There is an invisible, but solidly anchored assumption in all structured finance and derivative trading models — namely, that a systemic collapse would trigger a government bailout. Since each and every derivative trading model derives protection by externalizing risk to the trading system, systemic risk expands automatically (making systemic meltdown inevitable).

Institutions, then, have an incentive to be considered of “systemic significance” in order to secure a fail-safe advantage in interconnected transactions, even though by themselves they are not “too-big-to-fail”. These trading models are operative when they are marked-to-model, but inoperative when they are marked-to-market in a downturn.

This is the point when these models’ fail-safe strategy by government bailout is activated. Even a government like Hong Kong, which assumes a radical laissez faire posture, has had to intervene directly in the equity market because of the connections between a fixed exchange rate and unregulated financial markets that allow manipulators to attack its equity markets by rigging the automatic effect of exchange rates on interest rates to create deflationary pressure on stock prices.

As you will see, focusing on “too-big-to-fail” alone leave windows of vulnerability for “too-connected-to-fail” hazards.

Hong Kong Monetary Authority Fought Off Hedge Fund Attacks in 1997

In October 1997, three months after China recovered Hong Kong following a century and a half as a British colony, the HK$, which had been pegged to the US$, came under powerful, repeated, speculative and manipulative attacks due to the contagion effects of the Asian financial crisis. The automatic monetary adjustment forced interbank interest rates in Hong Kong to shoot up to unprecedented levels (up to an astronomical 300% at one point), reflecting substantial risk premiums on the HK dollar. This generated severe deflationary consequences for the financial and property markets, as well as the entire economy.

The interventionist role the Hong Kong Monetary Authority (HKMA) played in handling violent market turbulence was controversial by the standard of its own free market ideology. HKMA later admitted that as Hong Kong’s link mechanism was on “autopilot” during the attacks, the interest rate adjustments were part and parcel of the working of a currency board regime, and therefore generating an inevitable and painful financial crisis. The fact that such financial and economic pain was avoidable by de-pegging was not officially acknowledged as an option.

Hong Kong was the target of speculative and manipulative attacks four separate and sequential times during the Asian financial crisis of 1997. The first three attacks took the form of garden variety currency dumping, whereas the fourth attack targeted the structural vulnerability of the Hong Kong’s currency board regime after speculators were convinced that HKMA would defend the peg at all cost. And speculators were waiting to be the happy recipients of guaranteed profit from HKMA’s fixation on the peg.

Please read on for what's already happened worldwide from this game-playing financial system that is indeed "too connected to fail." The following is brought to you as a public service notice (by this blogger). I know it's boring to keep saying the same things over and over but if Elizabeth Warren is not chosen to lead the Consumer Financial Protection Bureau, you can kiss your financial butts good-bye a lot sooner. (Emphasis marks added - Ed.)
As reported on HuffPost last week, Treasury Secretary Timothy Geithner has expressed opposition to the possible nomination of Elizabeth Warren to head the Consumer Financial Protection Bureau, according to a source with knowledge of Geithner's views.

One can assume that Geithner, being very close to the nation's biggest banks, is concerned that Warren, if chosen, will exercise her new policing and enforcement powers to restrict those abusive practices at our commercial banks that have been harmful to consumers and depositors.

Certainly, Warren is not the commercial banking industry's first pick to serve in this new role. And unlike other legislation in which an industry's lobbying effort would naturally slow or cease once the legislation is passed, the new financial reform bill is continuing to attract enormous lobbying action from the banks. The reason is simple. The bill has been written to put a great deal of power as to how strongly it is implemented in the hands of its regulators, some of which remain to be chosen.

The bank lobby will work incredibly hard to see that Warren, the person most responsible for initiating and fighting for the idea of a consumer financial protection group, is denied the opportunity to head it. But this is not the only reason that Geithner is opposed to Warren's nomination. I believe Geithner sees the appointment of Elizabeth Warren as a threat to the very scheme he has utilized to date to hide bank losses, thus keeping the banks solvent and out of bankruptcy court and their existing management teams employed and well-paid.

And I was positive that someone else would document this one day.

That day has arrived. From Corrente (emphasis marks added - Ed.):

I'm sure that you've all experienced the phenomenon I call "the curse of the competent." It's monumentally frustrating, but quite common.

You are hired to do a job. You do it well. Unfortunately, as an unintended consequence of your competence, you make all the other idiots who aren't doing their jobs, or are doing them badly, look like, um, idiots. So then what happens?

You get the short end of the stick, of course. You get laid off, or you have to watch other people getting promoted before you, or you get demoted, or you never quite make it from temp to full-time. Meanwhile, the incompetent get the promotions, the kudos and the benefits of being a favored member of the group you have so cavalierly exposed. If you are a person who is already on the lower rungs of society - like, a woman, a person of color, an "out" LGBT, an older person, or some combination of these - it's even easier to make sure that you never get the recognition you deserve.

This is where Elizabeth Warren comes in.

For many years, Ms. Warren has labored under the mistaken impression that a consumer advocate should actually advocate for consumers. As Chair of the Congressional Oversight Panel created to oversee the banking bailouts, Warren has been the bankers' worst nightmare, and has become a popular favorite because of it. In December of 2009, she wrote that the middle class was disappearing through no fault of its own:

Families have survived the ups and downs of economic booms and busts for a long time, but the fall-behind during the busts has gotten worse while the surge-ahead during the booms has stalled out. In the boom of the 1960s, for example, median family income jumped by 33% (adjusted for inflation). But the boom of the 2000s resulted in an almost-imperceptible 1.6% increase for the typical family. While Wall Street executives and others who owned lots of stock celebrated how good the recovery was for them, middle class families were left empty-handed.

The crisis facing the middle class started more than a generation ago. Even as productivity rose, the wages of the average fully-employed male have been flat since the 1970s.

Please read on for way too much more of the truth than most are still able to handle about our history and what has brought us to this precipice for the middle class. Suzan _____________


Greendayman said...

Great post Suze - if Liz Warren doesn't get this job... we march. Either virtually or feet on the ground. This is serious.

More later,


Suzan said...

I'm with you, baby!

If I only could afford to go to a March!