Against Monopoly

defending the right to innovate

Financial Crisis

Monopoly corrupts. Absolute monopoly corrupts absolutely.

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Puzzled all the way to the bank

25 experts who denied the housing bubble

For the record, the blog, Economics of Contempt, has what it calls The Unofficial List of Pundits/Experts Who Were Wrong on the Housing Bubble link here

It begins, "The housing bubble has precipitated a severe, and possibly catastrophic, economic crisis, so I thought it would be useful to put together a list of pundits and experts who were dead-wrong on the housing bubble. They were the enablers, and deserve to be held accountable."

It cautions, "The list includes only pundits and (supposed) experts. That means the list doesn't include policymakers such as Alan Greenspan and Ben Bernanke, because however wrong they may have been, policymakers and especially Fed chairmen are undeniably constrained in what they can say publicly. I strongly suspect that both Greenspan and Bernanke honestly believed that there was no housing bubble, but alas, we'll never know for sure. The list also doesn't include pundits/experts who were wrong only about the fallout of the collapse of the housing bubble that is, the extent to which the collapse of the housing bubble would harm the economy."

Most of these names are new to me. But after the dot.com bubble, I stopped paying attention to "financial" experts. The current record doesn't make it any more likely I will change my judgment.

Financial reform looks doubtful

Bill Moyers Journal has had several programs on the financial crisis; the latest was this last week and is well worth watching (both the video and the transcript) link here.

Moyers interviews two writers for Mother Jones magazine, David Corn and Kevin Drum who have been investigating and reporting the scandal for some time. They detail how Wall Street money is fueling the political campaigns of both parties, is deeply embedded and enjoyed by the economic officials of the administration, and by Congress, not to mention the Washington think tanks. It pretty well dooms any meaningful financial sector reform; although the Obama White House has been leaking hopeful sounding trial balloons this week, holding one's breath is not to be recommended.

To predict the outcome, check what Wall Street is willing to accept and then read the fine print very carefully. And enjoy the video if you can.

Limiting banker compensation isn't real reform

"What's a Bailed-Out Banker Really Worth?" writes Steven Brill in his exploration of the ins and outs of setting executive salaries and benefits under the government's bailout of the too-big-to-fail banks and companies link here.

Started in response to the public anger over the financial mess, it is not likely to satisfy most people, based on this account. We are more likely to find our anger reignited, first by the level of compensation established and second by the behavior of the banks and their senior management, most of whom orally agreed to return their 2009 bonuses but then all but two failed to do so.

In some ways, this account is of a kabuki dance between special master for executive compensation Kenneth Feinberg on the one hand and the Wall Street banks where "by their account, all the bankers are above average and worth every penny of it", the Treasury Department, and the New York Fed on the other. The proof was the happiness of the bankers at what they got about 60 percent of the total compensation they had tried to justify.

Brill notes that the executives, their boards of directors, and the recruiters for board members are tightly meshed in their common interests in maximizing the levels of compensation, so that won't change.

Where the article fails is its lack of attention to overall financial reform. Executive compensation is a minor issue compared to the tens of billions that were earned by the banks and passed out to the Wall Street elite. The public is still waiting for that and hopefully will not be put off by minor cosmetic fixes such as are described here.

The banks are still avoiding reform and the public is paying

As we all know, the public is angry about the big Wall Street bank bailout and they have reason to be. Peter Goodman writes a "fair and balanced" piece quoting both critics and the banks on the government program to protect homeowners from foreclosure that is offering some palliatives but really only delaying the inevitable loss link here. At the same time, the banks seem to be making out very well. Goodman suggests with a few examples, that they are exploiting their superior bargaining position and knowledge to maximize their return.

The public is paying the banks in ways most people don't realize. They are of course aware that the government--i.e., the taxpayer--is on the hook for the direct payouts which must ultimately be covered by taxes. But that is a pain somewhere in the future, not today. But they are also paying in the form of reduced earnings on their savings as the FED continues its low interest rate policies. Low interest is essential for the banks to be able to get deposits or borrow in order to lend and "earn their way" back to solvency, but there it is again--the public pays, not the banks, or their stockholders or their management with their gigantic salaries, bonuses and benefits.

The public should also be asking about the reform they have been promised so that the same crisis doesn't occur again or is at least much less devastating. Instead, they hear about the successful lobbying of the financial industry to block it.

Wall Street: provably culpable or just untrustworthy?

GRETCHEN MORGENSON and LOUISE STORY add more detail to the story of the collapse of our financial system and how it was brought down by the gang of financial innovators at such respectable financiers at Goldman Sachs, Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc. link here

The article strongly suggests that the bankers knew what they were doing. They created bundles of mortgages and sold them off to credulous investors. Then they cranked up mortgage creators to market still more toxic mortgages on which to sell more credit default swaps (CDSs).

When that didn't satisfy the demand from investors, they came up with synthetic swaps. They knew the many of the mortgages were toxic and after selling them, bought swaps against their failing. When the demand for these grew too large, they created synthetic collateralized debt obligations (CDOs) and bet against them as well.

The mechanics of these transactions is a little complicated. First there is a bundle of mortgages. The investors who buy the package expect a steady flow of income. They are okay until the mortgages go bad.

In a totally separate transaction, banks bet against the mortgages by creating a synthetic collateralized debt obligation (CDO) made up of credit default swaps set up to pay when the mortgages fail. The banks pay a steady income to the sellers of CDSs until it goes under as the mortgages default. Then the bank collects from each CDS writer for each mortgage that defaults. The losers in these transactions are the ones who bought the CDSs. They may have no knowledge of the quality of the underlying mortgages that they are guaranteeing but are depending on the good faith of the seller.

The article notes, "Goldman used these securities initially to offset any potential losses stemming from its positive bets on mortgage securities. But Goldman and other firms eventually used the CDOs to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients' interests."

These and other industry practices are now the focus of "investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street's self-regulatory organization."

We are likely to see some indictments, if the sources quoted in the article can back up their assertions in court. There clearly was a conflict of interest between the firms and the buyers of these securities such that the firms appear not to have been acting in good faith. Former representatives of these firms now hold high positions in Washington.

Right now, one would have to question the sanity of anyone who trusts any of these firms with his money but so far they are still profiting greatly. From a purely economic point of view, these transactions are totally unproductive--the gains are matched by the losses on the other side. They only add to gross output to the extent of the net fees to the banks for creating and marketing the obligations and even that is of negative value to society--equivalent to that of services provided by casinos.

Don't reappoint Bernanke till we have regulatory reform

Binyamin Appelbaum and David Cho return to the problem of fixing America's credit system and of reforming the broken complex of supervisory authorities link here. The context is the reappointment of Ben Benanke to chair the FED and the push for regulatory reform which redefines the role of the FED, given the running failure of the regulators to protect consumers and the banking system from fraud or excess that produced the bubble and brought the economy down. The story has details that you probably haven't heard before and pins a fair amount of blame on Bernanke. In my mind, it raises a serious doubt about reappointing him in the absence of a prior major reassignment of regulatory duties, removing a number of them from the central role of the FED. The FED's primary duty remains using interest rates to control inflation and foster full employment. To argue as some do that the FED is ill-suited to preventing or popping bubbles doesn't persuade me that it shouldn't be done. The more deep seated issue is ending regulatory capture by Wall Street and that won't happen until we find a better way to finance politics.

Happy Thanksgiving from the Editors

Feds audit AIG bailout and fault it in part

The audit of the AIG bailout is now out link here. Mary Williams Walsh summarizes it here link here.

One can forgive some of the failings in light of the pressure to reach a deal that preserved the financial system. But not all. Once again, one has the feeling that the long arm of the epitome of Wall Street, Goldman Sachs, has produced a "solution" that was very good for it. Examples:

**No real effort was made to get the companies benefiting to take less than the book value of their loans. The Goldman argument that it had successfully hedged its deals with AIG and deserved to be fully compensated is faulted, on grounds that the hedges would not have survived the almost certain meltdown.

**The FED considered itself an AIG creditor rather than a regulator and "could not impose its will on banks but instead asked for voluntary concessions," in contrast to the auto bailout where the terms were crammed down them. Moreover it decided it could not treat foreign banks differently from domestic banks for fear of retaliation.

**Some banks argued that they could not legally take less than the contracted amount unless AIG declared bankruptcy, a long judicial proceeding that had to be avoided.

**The authorities insisted on secrecy to prevent the collapse from spreading but that was mistaken as whenever public funds are spent, the public is entitled to know.

McClatchy takes on Goldman

I have been waiting for more articles, but they seem to have stopped coming. So now it is time to post a suggestion that you read what there are, listed on the right of the link here. It is a pretty strong case against Goldman Sachs totally profit oriented, self-regarding behavior put together by McClatchy news. Not a court case, I think, but one which underscores that without regulation or breaking up Goldman, a financial crisis will recur, brought on by much the same behavior: *corrupted results from the rating agencies which produced misleading reassurances to investors. *lending on subprime mortgages, reselling them, and betting that the housing market would tank along with the mortgages it sold. The final irony is Goldman's current claim attacking McClatchy's series but with no specifics and asserting that it has not profited from the government's bailout of the financial sector.

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