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Vol. 12 Issue 43…Dedicated to the Dialogue on
Race…October 25, 2009
Hood Notes
Brooksley Born: The Woman Who Cried Wolf
By John Burl Smith
PBS' Frontline told a very
enlightening story about Brooksley Born. She grew up
in an atmosphere where public service was the highest calling and the way to
give back to the society for all its benefits. Her mother was an English
teacher and her father the director of public welfare in
A graduate of
After arriving at the CFTC,
over-the-counter (OTC) derivatives became a concern when Procter & Gamble
and Gibson Greeting Cards' suited Bankers Trust -- Bankers Trust was their
over-the-counter derivatives dealer. Also,
From Born's
perspective, one thing was clear; although the CFTC had exempted the market
from most regulation, it retained fraud and manipulation prohibitions against
the market. She realized that if there were no record-keeping or reporting
requirements imposed on participants in the market, how could the CFTC detect
these malfeasances or deter them? The only way the CFTC knew about the Bankers
Trust fraud was because Procter & Gamble and others filed suit.
The Procter & Gamble and
Gibson Greeting Cards' suits,
Brooksley Born reached the conclusion that:
"These guys are operating outside of the legal structure. Somebody has to
do something about it, because if they don't, there's going to be a
calamity." The CFTC assembled a small team in January 1998 to sort things
out and make recommendations. Born decided to issue a concept release, which is
essentially a very preliminary white paper produced by a regulatory agency. The
goals were to present the problem and propose a broad range of possible
solutions to the problem without reaching any conclusions.
Before the ink dried, the free market capitalists rallied their forces in the
White House and Congress to fight any attempt to regulate derivatives. Led by
Clinton's President's Working Group on Financial Markets, which included
Treasury Secretary Robert Rubin, Economic Advisor Larry Summers, former
Securities and Exchange Commission Chair Arthur Levitt
and Federal Reserve Board Chair Alan Greenspan, the "Gang of Four,"
went after Born. This was not a gunfight at the OK Corral; this was a gloves-off,
no holds barred barroom brawl. Alan Greenspan, a force to reckon with, who
opposed regulations, led with his very orthodox free-market views. He made it
clear he disagreed with Born's view that "fraud
needed to be investigated or was something that regulators should worry
about."
Rubin was the face man and he spent a lot of time covering Greenspan's
orthodoxy rear. Larry Summers was the enforcer. He tried to soften Born up with
a telephone call ranting, "There are 13 bankers in my office who say,
you're going to cause the worst financial crisis since the end of World War II.
Stop, right away. No more."
A meeting on April 21 with the President's Working Group, which was described
as "very, very, very tense," was designed to stop Born from moving
ahead with the "concept release." Their ambush left Born bloody but
unbowed. The CFTC went ahead with the "concept release" and the Federal Register published it on May 12.
By that afternoon, Rubin, Greenspan, and Levitt put
out a statement publicly attacking Born, "This is a very bad thing, and
Congress should act with all deliberate speed to block it." Congress
passed a moratorium preventing the CFTC from regulating derivatives. In 2000,
it passed the Commodity Futures Modernization Act, which essentially
deregulated derivatives. Congress also repealed the Glass-Steagall
Act when it passed the Gramm-Leach-Bliley Act.
Brooksley Born recognized that the wolf was at the
door and tried to warn the nation of the impending disaster. The financial
service sector, its lackeys in the White House, and the best Congress money
could buy drove her from office. However, the true tragedy is Born was proven
right by the financial crisis of 2008. Most of the people who beat up on her
were instrumental in deregulating toxic derivatives which are what taxpayers
bought with the $700 billion bailout. The same people who helped convince the
American people to bail the banks out by buying their toxic derivatives,
Timothy Geithner and Larry Summers, now run the
Why Derivatives Are Toxic Assets
By John Burl Smith
Although the collapse of the
United States (US) financial service market occurred during the Bush
administration, the precursors were put in place during the
Robert Rubin and Larry Summers
were wedded to outmoded free-market economics, which assumes perfect
information, perfect competition, perfect markets, perfectly informed market
participants and no exploitation -- all the assumptions that are influenced by
government action in complex modern economies. They ignored government actions
that facilitated the tech bubble and the housing bubble; instead, they saw an
invisible hand.
However, if they had opened their
eyes, they would have seen the heavy hand of government moving things,
intervening or withholding capital around the world. For instance, the U.S.
Treasury, IMF -- repeatedly rescued banks and businesses during situations like
the Latin America crisis in the 1980s, the Mexican crisis in 1994-95, followed
by the Korean crisis, the Indonesian crisis, the Thai crisis in '97, and most
notably the Russian and Brazilian crises in '98. All of these situations
involved hundreds of billions of dollars, and the lack of transparency was the
only reason government intervention was invisible.
Glass-Steagall,
passed during the aftermath of the Great Depression, was another issue hotly
debated. Responsible for the quarter century of strong financial market
regulations after WWII, it resulted in almost no financial or banking crises.
This was a period of very rapid economic growth which began to reduce
inequalities in the
Derivatives had become a major source of revenues for a few big banks, and
obviously they wanted to grow this source of profits. They fought tooth and
nail to keep them as over-the-counter products, hence no one could see what the
real price was, nobody could see what they could trade
for. Most importantly, nobody really understood how this dark market worked.
Investment banks and commercial banks are and ought to be very different.
Investment banks take rich people's money seeking high returns but can bear the
high risk, which is appropriate. Basically, commercial banks are supposed to
provide finance to small and medium-sized enterprises, as well as individuals.
They are an essential part of the lifeblood of an economy. That kind of banking
is supposed to be conservative. It is supposed to assess risk and make sure
capital goes to those who can afford it. Glass-Steagall
maintained that bank division.
Once repealed, the two became one. When you put them together, unfortunately,
the high-stakes, high-return culture of the investment banks dominate the
commercial banks, which have the security of deposit insurance and the backing
of the
Over-the-counter derivatives dealers are a huge profit of investment banks. The
collapse of Long Term Capital Management (LTCM) and American International
Group (AIG) is a great example of how the whole thing works. LTCM collapsed in
September 1998. It was a very large hedge fund that had $1.25 trillion in notional
value of over-the-counter derivatives, but it only had $4 billion in capital to
support that enormous debt. Excessively leveraged in a dark market, no one knew
it was bankrupt until it was too late. The kind of reckless speculation,
gambling on prices, on interest rates and foreign exchange rates using
derivatives in which AIG engaged in is not only legal, it is protected from
scrutiny by of all things regulations.
The problem lies in investors’ ability to make margin calls. For example,
in the equities market, an investor can buy a stock on 50 percent margin. In
other words, they borrow 50 percent of the money. Where as in the futures
market, where derivatives are traded, investors only have to put up 4 to 7
percent; 93-96 % is borrowed money. The rationale is,
it's a risk-shifting market where people are hedging their risk, more like
insurance policies than investments.
A crisis occurs in the market and investors may not be able to make their
margin calls in the futures market. The futures exchanges are on the hook
because if investors cannot make their margin, the exchangers are exposed. They
are the ones who are effectively lending the money. If they don't get paid the
margin, they could go bust, and that would cause systemic risk for the economy.
This is what happened in the 2008 bank crisis -- one big institution AIG
failed; it was unable to pay its obligations. This forced somebody else who
could not pay their obligations into dangerous territory; and pretty soon it's
a falling domino effect throughout the economy.
Unlike, real estate mortgages
which are real assets to which a value can be set, derivatives are toxic assets
because they are bets on conditions or situations. Bespoke is the technical
term for this kind of derivatives. Bespoke means one of a kind. These are
complicated contracts that cover a particular instance, one deal only. It
cannot be replicated. It is not like buying a share of IBM that is exactly the
same as every other share of IBM. This is a credit default swap with a particular
set of terms which is built around a particular series of deals.
This is why this stuff became
toxic; they are one-of-a-kinds that are un-tradable. There is no real market
for them. They don't mark to market, i.e., there is nothing with which to
compare. So they mark to model. OTC dealers use highly sophisticated fancy
financial computer models every quarter to mark them to the model. These are
very complex instruments, and the way they work is pretty complicated to figure
out values and the circumstances under which an investor profits and the
counterparty loses. And those tools weren't available to the other parties.
For many years the model said
they were worth more, and more, and more, so they were marked up. Now finally,
the model said: Foreclosures are up. Subprime is down. They have to be marked
down. Derivatives (economic landmines)
start to blow up. But the dealers or banks are still stuck with them. They
can't be traded. There is nothing that can be done with them, unless you have
friends in the
Movement Against Banks
By Ruth Conniff
A massive rally in
While, Americans face shrinking
pensions, rising foreclosures and unemployment, state budget cuts, predatory
lending, outrageous overdraft fees, and sky-high credit card interest rates,
the financial institutions that caused the economic crisis and took billions in
taxpayer bailouts are back to earning incredible profits. Rally organizers,
including Public Citizen, the AFL-CIO, and Change to Win, will demand oversight
and accountability and reforms that rein in the banks. This rally marks an
important moment, since Congress takes up regulatory legislation, including the
idea of a Consumer Financial Protection Agency, this month.
The Obama Administration backs
the idea of a consumer protection agency, but is shying away from other
reforms, including breaking up "too-big-to-fail" banks and separating
commercial banking activities from the investment activities that led to the
current financial crisis. According to the New York Times, Paul Volcker, the Federal Reserve chairman from 1979 to 1987,
has been marginalized by Obama's pro-Wall Street economic advisors for
suggesting a return to the 1933 Glass-Steagall Act,
which mandated the separation of commercial banking and investment activities.
Meanwhile, Bankster,
"your go-to site for updates on the financial services re-regulation fight
in Congress and for progressive net-roots campaigning against the big boys on
Wall Street," is up and running. The site, a project of the Center for
Media and Democracy, aims to be the most comprehensive resource on the web for
lay people who want to understand the battle for control over the financial
services industry.
The site calls for criminal penalties for the bankers: "On the one-year
anniversary of the Banksters blowing a hole in the
global economy, no employee of a major American bank or financial institution
is behind bars. Compare this to what happened after the Savings and Loan heist
almost 20 years ago. No less than 1,852 S&L officials were prosecuted and
1,072 were jailed. Over 500 CEOs and top officers were indicted. What is going
on here? Don't we believe in holding people accountable anymore? Tell the U.S.
Department of Justice and the FBI to get cracking!"
Among the other citizens' groups featured on the site is the "10 percent
is enough" campaign that brings together leaders from all the major world
religions to oppose usurious interest rates on moral grounds.
And, just in time for Halloween, the anti-death-bonds campaign focuses on an
issue Michael Moore brought to light in his new movie, "Capitalism: A Love
Story": employers and investment firms such as Goldman Sachs taking out
life insurance policies on working people and naming themselves the
beneficiaries, so they can benefit from your death.
All of these issues should galvanize public opposition to the banks' control of
their own regulators in
We can start the protest against the exploitation on Monday at the ABA Annual
Meeting Business Expo and Directors' Forum. The event is scheduled for October
25-28, 2009 at the Sheraton Chicago Hotel & Towers in
Zooming In on the Year's Biggest Hoax
By Robert Scheer
Who are these people? I am not
referring to the pathetic parents of "Balloon Boy," whose fake drama
I have been unable to escape while on the treadmill this week, thanks to my
gym's insistence on tuning its flat-screen TVs to Wolf Blitzer's nonstop
self-parody.
The
The people I want to know more about are the superrich who expect to be
rewarded for their failures, like the folks at Goldman Sachs who will receive
$16.71 billion in bonuses--an average of $530,000 per employee--this year after
their company did as much as any to bring the world economy to the brink of
disaster.
"The Guys from Government Sachs" is what The New York Times once
called them in recognition of their chokehold on the federal government. Their
power is marked by the two treasury secretaries who led the fight to legally
enable and then reward Wall Street for its obscene excesses. Why wasn't there a
CNN stakeout at the homes of former Goldman-execs-turned-treasury-chiefs Robert
Rubin and Henry Paulson aimed at finding out how they feel about the almost $7
billion profit that Goldman Sachs made in the last two quarters in the wake of
the government's bailout of the firm?
They were both deeply involved
last fall, along with Rubin protégé and current Treasury
Secretary Timothy Geithner, then head of the New York
Fed, in saving Goldman as archrival Lehman Brothers was forced to go belly up.
As opposed to Lehman, Goldman was allowed to change its status and become a
commercial bank qualifying for Federal Reserve and TARP funding. Goldman
received $10 billion in immediate bailout funds, and we are supposed to be
grateful that the company has paid it back in return for an end to any pretense
of government control over its executive compensation. The additional cool
$12.9 billion that Goldman received from the government as a pass-through from
the bailout of AIG to cover Goldman's toxic paper is money the investment bank
has no intention of ever paying back.
The rationale for saving Goldman and the other too-big-to-fail usurers was that
the rescue would increase lending to businesses and consumers and thus revive
the economy. But Goldman made money last quarter by shunning such loans and
instead putting the government-guaranteed low-interest money it now can borrow
toward acquisitions and bond and stock trading. As The New
York Times reported: "Titans like Goldman Sachs and JPMorgan
Chase are making fortunes in hot areas like trading stocks and bonds, rather
than the ho-hum business of lending people money."
Under the headline "Bailout Helps Fuel a New Era of Wall Street
Wealth," Times reporter Graham Bowley detailed
many of the enabling favors that the government, under two presidents, extended
to Goldman, like clearing the way for the company to issue bonds guaranteed by
the FDIC. "It may come as a surprise that one of the most powerful forces
driving the resurgence on Wall Street," the Times reported, "is not
the banks but
It should not come as a surprise to Timothy Geithner,
who, as The Wall Street Journal reported last week, talks to the honchos of
Goldman more often than to members of Congress ostensibly in charge of banking
legislation. Nor will it shock the lobbyists for Wall Street--augmented, as The
Nation reported last week, by the pro-Goldman efforts of former Democratic
congressman and faux populist Dick Gephardt--that the rich will emerge richer
from this deep recession in which so many Americans have lost everything. The
die is cast: People working in finance grabbed two-thirds of the growth in GDP
over the last decade, with the rest of us scrambling for the other third.
Nor will the situation change
anytime soon. The House Financial Services Committee is in charge of writing
new rules to protect consumers, but as the respected Sunlight Foundation
reports, 27 of the 71 members of that committee receive at least one-fourth of
their campaign funds from the financial industry, with the rest of the
committee members not far behind.
Now if we could get one of the banking lobbyists to float a duct-taped flying
saucer balloon, Wolf Blitzer might cover the real hoax.
About
Me: Robert Scheer is editor of Truthdig.com.
His insightful articles can be found at www.truthdig.com.
Opting Out!
By Dot
Obviously, the financial sector
thinks the public is too stupid to realize when it is being robbed. For
instance, the banks are currently paying less than four percent interest on
most types of savings, whether money market funds, certificates of deposits
(CDs) or just your regular savings account. In fact, any type of savings account
with maturities of a year or less yields (pays an interest rate) of less than
one percent. Contrast this paltry sum with what banks and credit card companies
charge, and the public should be up in arms.
The current fed funds rate, the
rate banks charge each other in the overnight lending market, is 0.25%,
practically nothing. Also, the federal discount rate, the short term rate
charged by the Federal Reserve to member banks, is a mere 0.50%. So, there is
plenty of money; the economy is awash in liquidity. Borrowing for the big boys
is historically cheap!
According to the Wall Street
Journal, the current prime rate, the interest rate charged the best customers,
usually institutions, is a low 3.25 percent. As you know, the prime rate forms
the underlying index for most consumer loans, including home equity loans and
lines of credit, auto and personal loans and credit cards.
Given that there is so much liquidity and it costs so little for banks to
borrow the money they lend, imagine my surprise on receiving a notice of change
to the interest rate on my credit card. According to the notice, the effective
annual percentage rate on new charges and the existing balance with go from a
high 9 percent to 19.99%. I was sure I read that wrong, so I read it several
times just to make sure. I was also sure they could not do this!
Alas, the new credit card
regulations that prevent such abusive practices do not become effective until
July 1, 2010. In the meantime, credit card companies are raising rates.
I have chosen to exercise my
right to opt out. I choose not to be robbed; this interest rate is usurious.
The spread between what its costs the bank and what they charge for it is well
over ten percent. I cut up the card. Using the opt-out instructions that
accompanied the proposed rate hike, I called my credit card company and told
them I would like to close my account. I will still have to pay the balance,
but I will do so at the current interest rate.
Consumers are at the mercy of the financial sector, which is unquestioningly
supported by the federal government. We are the underdogs in this situation.
However, opting out and protesting are viable actions that we can undertake to
demonstrate we refuse to be robbed! If enough of us opt out, the financial
sector will be forced to respond by lowering interest rates or cease to
operate!
Mailbox: E-Mails, Faxes and
Telephone Calls
Email www.forbes.com
...French official says U.S. trying to inflate away debt...The United States is
pumping out liquidity to try to inflate away its debt, leading to the
depreciation of the U.S. dollar, Henri Guaino, a top
advisor to French President Nicolas Sarkozy said on Tuesday.
He told reporters on the sidelines of a conference of Sarkozy's
ruling UMP party that the
Email http://money.cnn.com ...The latest
bubble is about to burst, but this time it's in the commercial market....By Katie
Benner...When the FDIC closed Chicago's Corus Bank
last month, it may have signaled the beginning of the next shock to the banking
system: commercial real estate defaults. Corus, whose
balance sheet was larded with bad construction loans, is just one of many banks
that have a slew of this debt on their books. Refinancing the $2 trillion in
commercial mortgages will be tough, as property values decline. And in this new
age of cautious lending, few banks are willing to refinance loans. Now, in a
situation eerily similar to the subprime crisis, the result is likely to be a
wave of foreclosures and loan defaults that could, in turn, trigger a collapse
in the market of the structured bonds backed by commercial real estate and
construction debt.
Email http://cnnmoney.com ...Foreclosures: 'Worst
three months of all time'...Despite signs of broader economic recovery, number
of foreclosure filings hit a record high in the third quarter - a sign the
plague is still spreading...By Les Christie...Despite concerted government-led
and lender-supported efforts to prevent foreclosures, the number of filings hit
a record high in the third quarter, according to a report issued Thursday.
"They were the worst three months of all time," said Rick Sharga, spokesman for RealtyTrac,
an online marketer of foreclosed homes. During that time, 937,840 homes
received a foreclosure letter -- whether a default notice, auction notice or
bank repossession, the RealtyTrac report said. That
means one in every 136
Email www.commondreams.org ....Bailout Helps
Fuel a New Era of Wall Street Wealth...By Graham Bowley...Even
as the economy continues to struggle, much of Wall Street is minting money -
and looking forward again to hefty bonuses. Americans
wonder how this can possibly be so soon after a financial collapse, even as
legions of people worry about losing their jobs and their homes?
Many of the steps that policy
makers took last year to stabilize the financial system - reducing interest
rates to near zero, bolstering big banks with taxpayer money, guaranteeing
billions of dollars of financial institutions' debts - helped set the stage for
this new era of Wall Street wealth. Titans like Goldman Sachs and JPMorgan Chase are making fortunes in hot areas like
trading stocks and bonds, rather than in the ho-hum business of lending people
money. They also are profiting by taking risks that weaker rivals are unable or
unwilling to shoulder - a benefit of less competition after the failure of some
investment firms last year. So even as big banks fight efforts in Congress to
subject their industry to greater regulation - and to impose some restrictions
on executive pay - Wall Street has Washington to thank in part for its latest
bonanza.
Email www.legitgov.org ....Bank closings hit 101
for year; most since 1992...Bank closings for the year have surpassed 100 as
regulators shut down small banks in Florida and Georgia. Financial institutions
nationwide have collapsed under the weight of soured real estate loans and the
Bush Depression. The Federal Deposit Insurance Corp. took over Partners Bank in