Find Insurance Online

To simplify how Goldman Sachs got into trouble with the SEC: According to Annie Lowrey, the hedge fund Paulson & Co. handpicked mortgage-backed securities that were doomed to stop performing, being backed with subprime mortgages, and Goldman packaged them into a kind of bond. Paulson & Co. bet against the bond by buying short-sales, with Goldman acting as the broker. At the same time, Goldman sold the bond to other clients without disclosing that Paulson had engineered the bond to fail. The SEC filing notes that those other clients lost $1 billion. Goldman had no direct stake in the success or failure of the CDO. It made money either way. “This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another,” Chris Whalen, a bank analyst at Institutional Risk Analytics, said in a note to clients on April 16, 2010. Someone at Goldman said on the same day that “the SEC’s charges are completely unfounded in law and fact.” If the SEC charges hold up (and it is doubtful that the agency would bring such charges without supporting documentation; it is more apt to miss something than go overboard), I am astonished that the people at Goldman simply dismissed the matter out of hand. It might make sense as their legal defense, but if the bankers are convicted, those lying ought to be fired even if they were not a party to the scheme. It also appears that the bankers lied about whether they made money in betting against the housing market. “The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’ ” Senator Levin, chairman of the US Senate’s committee on investigations, said in a statement in April, 2010. “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.” When a spokesperson for the bank says something in the future, a rational person will be wont not to trust him or her. Lying has (or ought to have) consequences rather than being dismissed as harmless PR or a legal defense. The bank’s credibility is at issue here. The SEC has accused Goldman of outright lying to customers in order to make money both ways on a deal. Even though this ought to reflect negatively on Goldman’s future business, bigger issues involved that ought to consume more of our attention than how Goldman fares.

Given the strength of the financial sector’s lobby in Washington, this case involving Goldman suggests that we, the American electorate, were unwittingly putting our financial system and our republics in danger by enabling the lobby to have such effect in watering down the regulatory reform in the wake of the financial crisis of 2008.

In the election cycle in which the US Senate’s agricultural committee took up legislation that would regulate all derivatives (2010), people and organizations affiliated with financial, insurance and real estate companies gave members of the committee $22.8 million. Wall Street firms raised $60,000 at two fund-raisers for the committee’s chair’s re-election campaign in the cycle before the committee took up the legislation. Many of the chairs constituents want a crackdown on the speculation. This put Blanche Lincoln in a difficult situation, ethically speaking. At the very least, accepting money from the firms that would be subject to the legislation involves the appearance of a conflict of interest. I contend that given human nature, even such an appearance ought to be avoided or even outlawed. At the very least, it is unseemly in a republic, and I would argue dangerous to its viability.

Furthermore, as if the banks’ culpibility in the crisis was not sufficient to cancel their reservations at the regulatory table, the Goldman case strongly suggests that the banks ought not to be trusted as contributors to regulatory reform. And yet they push ahead to reduce the regulatation, in spite of it all. A child who drops his milkshake doesn’t turn around and tell his mother that she better not clean it up and that she had better not get involved if it happens again. Rather, such a child stands back. As if there is not enough of a natural feeling of shame at having made a mess, there is, or ought naturally to be, an even greater sense of shame in presuming to be in a position to direct the clean-up according to one’s self-interest over objections that the person who caused the problem is not the one best suited to fix it. Even if corporations can enjoy the legal fiction of personhood, there are actual human beings running them, and it is telling when those people dismiss their innate shame in their presumption–even pretending that it is not presumption! We are to blame in not calling them on it, and relegating them. We must relegate them if they won’t do it for themselves, as would be natural for them to do. In other words, we ought to call the artiface for what it is and relegate it as a parent would naturally tell a spoiled and misbehaving yet dogmatic child to go to his room. We, the American people, are enablers; bad parents. We ought to look toward solving the bigger problem, which the case of the Goldman children intimates.

The theory of regulatory capture points to the government’s need for information that the industry being regulated can provide. This theory ignores the broader power-base that an industry is apt to have in lobbying the government (and supporting candidates). In other words, information is just small change from the standpoint of an industry’s ability to influence a government. A better theory would have its primary focus on the macro level, asking the question, in effect, whether (and how) a republic is compromised by its moneyed corporations and banks. Besides looking at campaign finance law and uncovering actual lobbying practices, we ought to look at how much the society in question values money, commerical gain, wealth and economic freedom. We ought not be limited to the managerial or technocrat perspective in ascertaining whether our financial system and indeed our very republics are in danger from being used by unscrupulous firms or industies according to that which fits their peoples’ desires. Once we have uncovered the real problem, we really won’t have any excuse for not fixing it, and we would be bad parents indeed if we let the children fix it.

Sources:
http://washingtonindependent.com/82571/sec-charges-goldman-sachs-over-subprime-tied-product  http://opinionator.blogs.nytimes.com/2010/04/16/goldmans-stacked-bet/?ref=opinion
http://money.cnn.com/2010/04/16/news/companies/sec.goldman.fortune/index.htm?postversion=2010041616 ; http://money.cnn.com/2010/04/16/news/companies/goldman_sachs_questions.fortune/index.htm?postversion=2010041615 ; http://www.nytimes.com/2010/04/20/business/20derivatives.html?hp
http://www.nytimes.com/2010/04/25/business/25goldman.html?ref=us

To put a matress under a falling giant pales in comparison to placing a sign on Wall Street, reading “No giants allowed.”

In April of 2010, President Obama gave a speech in New York City to counter what he called “the furious efforts of industry lobbyists” trying to weaken or kill new financial regulations that he claimed are needed to stave off a second Great Depression.  It is telling that the banks that contributed to the financial crisis of 2008 were trying to diminish any new regulation. The President wanted more consumer protections, limits on the size of banks and the risks they can take, reforms on executive compensation and greater transparency for controversial securities known as derivatives.  He maintained that each of these areas must be in any bill that he signs. In giving the speech with some of the banking titans in the audience, the President wanted to confront the financial industry more directly through a sharp speech. After castigating their “failure of responsibility” in recent years, he called on them to stop resisting tighter regulation through the army of lobbyists now staked out on Capitol Hill. The president’s address at Cooper Union in Lower Manhattan circled back to another speech he had given at the same location in March 2008 warning of financial manipulation, market bubbles and the concentration of economic power.

Analysis:

At the time of his speech, the President was supporting the bills coming out of the House and Senate, neither of which forestall or minimize market bubbles and reduce the concentration of economic power.  Regarding the latter, it is my understanding that nothing in either bill limits the the size of the big banks.  For the President to say that the bill reaching his desk must include something limiting the size of institutions in the US financial sector yet also say that he supports the bills coming out of Congress does not make sense as it involves a contradiction. On the eve of the President’s speech, Fox News pointed out that the President’s chief of staff had met behind closed doors with reps of Wall Street firms. The message was reportedly: we’ve got to trash you in public, but know that we will take care of you in private.  While Fox News was at the time certainly no friend of the President, the account would explain why the President would contradict himself concerning the size issue.   Given the inevitable lag of regulators amid the fast pace of innovation in product development on Wall Street, simply regulating existing products would not forestall another crisis; the concentration of private capital in the form of large banks must be reduced for “too big to fail” to be effectively mitigated.  Sadly, the President will probably get away with demanding limits on the banks’ size while signing bills that do not contain such language.  That he received just under a million dollars from Goldman Sachs in his Presidential campaign is just part of the story, for once elected the President was undoubtedly focused on 2012.  Recalling Andrew Jackson, who successfully took on the bank of the US by refusing to fund it in 1832, and Theodore Roosevelt, who supported the Sherman Anti-trust Act in 1911, I must admit to thinking that Barak Obama does not have their guts to take on the big guys. How many of us in the twenty-first century remember Jackson or Roosevelt?  We are more likely to make our current President the default from which we measure.  I submit that this is a mistake.  If we ignore or are ignorant of the strong points in our history, we cannot benefit from them and we are doomed to repeat the weak points.

Source: http://www.nytimes.com/2010/04/23/business/economy/23prexy.html?hp

A month into the BP oil spill in the Gulf of Mexico, some commentators began to wonder out loud whether the US Government ought to take over for BP in stemming the leak. As frustrated as those commentators were at BP–after all, the oil company had shirked safety procedures and lied about having the technology to manage such a spill–they had to admit that the US Government did not have the technical expertise to divert or shut off the oil.  For better or worse, we had to rely on BP in capping the leaks.

Having to rely on the culprit to solve the problem and clean up the mess sounds a bit like how the financial crisis of 2008 was managed.  In other words, we have managed to become dependent on firms such as Goldman Sachs and BP even where they are the culprits.  To be sure, government is an authority or umpire in society, not a producer.  To treat government as a business evinces a category mistake of sorts. Were it to operate as a producer, there would be a conflict of interest in its governmental capacity because it would be inclined to favor itself even as its umpire function requires having an even hand. It is also a cateogory mistake to treat a business as having a governmental capacity.  Hence, we don’t want the banking or oil lobby running Congress.

Rather than become an oil company, the executive branch of the US Government ought to concentrate on better organizing itself in its umpire capacity. In particular, the Department of Homeland Security (i.e., the Coast Guard), the Energy Dept, and the Interior Department each had a ball in play as the oil spill unfolded. Hence the umpire could not speak with one voice, as the US President must rely on someone to handle the day to day umpiring.  We couldn’t very well have the President living on the Lousiana coast as the oil leaked.  Having too many cooks in the kitchen makes for confusion. The relevance of the Interior Department alone is debatable, as the spill did not take place in the interior. Even so, the administrators were falling over each other in positioning themselves. Advocating that the government take over from BP would only multiply the harmful effects from the confusion that is immanent in the branch’s structure.  I would even contend, moreover, that the US President should concentrate on governmental domains in which the several states cannot act (even if some won’t!), rather than wading into every problem.

In short, the US Government can’t do it all, hence it shouldn’t try. Where it is the only umpire in town, such as out in the Gulf, it should concentrate on being a good umpire. This includes not only simplifying its own organization (in the exec branch), but also keeping itself from being unduly influenced by business so it can be an effective umpire.  Allowing Wall Street to have influence over the writing of financial regulation (or oil companies in MMS) not only compromises the government’s umpire function, it also permits sordid companies to exist, and thus to potentially be relied upon in stopping the leaks whether in the financial world or in the Gulf.  The US Government ought to concentrate its power so it can be a viable umpire, rather than allowing itself to become a confused sieve.

As BP was wrestling with stopping the oil leak in the Gulf of Mexico and cleaning up the oil, a controversy broke out between the company’s stockholders and the  US Government on whether any dividends should be declared and paid before the company has taken care of the Gulf.  BP earned more than $16 billion in 2009. Based on higher oil prices, in the first quarter of 2010 the company’s profit more than doubled to $6.08 billion from $2.56 billion  in the first quarter of 2010.  BP’s dividend payment accounted for about £1 of every £8 handed out by British companies in 2009. Given the higher profit in the first quarter of 2010, stockholders were expecting more in dividends.

The question was how much the company’s costs in regard to the Gulf would or should cut into the dividents; the political question was whether any surplus wealth should be paid to investors before the company’s legal and moral obligations were taken care of in the Gulf region.  Although not suggesting that their company was not obligated to stop the rupsure and fund the clean up, BP officials claimed that their company had already paid in other ways.

Already by mid June, 2010, BP shares had fallen more than 40 percent since the fatal explosion at the Deepwater Horizon drilling rig in April, wiping more than £50 billion, or $73 billion, from the company’s market value. The drop came after lawmakers in Washington called on BP to suspend its dividend and advertising campaign to pay for the cleanup, and a senior official said the Justice Department was “planning to take action.” Most shareholders rejected concerns that the costs of a cleanup and possible damages could force BP into Chapter 11 bankruptcy protection, and said the drop in the share price is not justified by the value of BP’s assets.  BP officials indicated the company’s executives would decide in July whether to keep the quarterly dividend at 14 cents a share for the second quarter. In 2009, the company paid about $10.5 billion in dividends.

By June 10 2010, the company’s cost in regard to the oil spill had reached about $1.43 billion. A BP official said it was “too earlier to quantify other potential costs and liabilities associated with the incident.”  Earlier in June, BP officials told investors that the company had $5 billion cash on hand and that it was generating “significant additional cash flow” as the price of oil remained above $60 a barrel. BP had 18 billion barrels of proved reserves and 63 billion barrels of resources at the end of 2009 that it could draw on.

Iain Armstrong, an analyst at investment manager Brewin Dolphin in London agreed with BP that the company had enough money to pay for the cleanup efforts and also rejected any potential concern that the company might not be able to pay for its debt. “It’s gotten completely out of hand,” Mr. Armstrong said. “It’s a totally overpoliticized situation. There is a disconnect between reality and BP being totally lambasted… . Ironically, by being extremely strong financially, BP has become a target here,” he said. I contend, however, that BP became a target because of its atrocious safety record and its culpability at Deepwater Horizon.

BP falsified regulatory documents by indicating that there was zero percent risk of an off-shore rig accident creating a rupsure and that the company had the technology to stop and clean up such a problem.  Tony Hayward admitted after the explosion that BP lacked the “tools you would want in your tool kit” to close a blown deep-water well.  In other words, the earlier claim to have had the technology was a lie (which MMS never bothered to disconver, as the agency had been captured).  Lest it be said that no group of people is perfect, BP’s history attests to justifiable blame.

In 2005, a blowdown drum overfilled with liquid hydrocarbons at BP’s Texas City refinery killed 15 and wounded 170.  BP was cited for old equipment, overworked and unsupervised employees and contractors, and managerial inattention to safety. The US Chemical Safety Board put the cause as “organizational and safety deficiencies at all levels.”  Meanwhile, a shoddy ballast system was found at BP’s offshore platform Thunder Horse.  In 2006, a corroded pipeline in BP’s Purdhoe Bay field in Alaska leaked thousands of barrels. In the following year, Tony Hayward became the CEO. He promised to make safety his priority. Yet in 2009, the Occupational Safety and Health Administration fined BP a record $87.4 million for more than 700 safety violations at the Texas City refinery. Nonetheless, David Nicholas, a BP spokesman, wrote, “Safe, reliable operations have been and continue to be our number one priority.”  Not only has this not been the case, BP managers (and lawyers) have been more interested in minimizing liability than being responsible for the consequences of the lapses.

At Deepwater Horizon, when an employee discovered that one pod of the blow-out preventer was leaking, a manager simply shut it down and used the other pod (rather than fixing the leak). Another worker found such low hydrolic pressure in the device that he knew it was time to leave.  In Congressional testimony, Tony Hayward said BP regarded the equipment as the fail-safe mechanism, even as blow-out preventers in general have a 44% failure rate and the device at Deepwater Horizon was known to have a broken pod. Furthermore, after the well fire, the company low-balled the estimated volume of oil going into the Gulf in order to minimize its future liability.  During the first week after the explosion, the company’s estimate was 1000 barrels per day.  During the second week, the company estimated 5000.  Meanwhile, company documents show an estimate of 100,000 per day as a worse-case scenerio. That the wider society would not be sufficiently informed of the magnitude of the clean-up required did not seem to bother the managers at BP, whose concern was mainly to minimize the company’s liability (and thus maximize their stockholders dividends).  Selfishness among the culpable is telling. At the very least, responsibility can be defined as paying for the harm consequent to one’s mistake.  Satisfying such responsibility has priority over dividends, which are residual, after all. In making the protection of dividends (and the stock price) a priority, BP’s managers evinced a reversal of priorities that was ahistoric for the modern corporation.

It is for these reasons, not because BP is a giant corporation or is British, that BP was the target of such scathing rebuke by the American public and the American governments. Mr. Armstrong said that President Obama should not forget that 40 percent of BP shares are owned by United States shareholders. “So he’s not doing them any favors either,” he said. Again, I beg to differ. Acting in the public interest, Barak Obama is doing us all a favor.  Of course, the politics of this matter were no doubt different in Europe.

London’s mayor, Boris Johnson, said Thursday that the drop in BP’s shares was slowly becoming a political issue in Britain. “When you consider the huge exposure of British pension funds to BP and the BP share price and the vital importance of BP then I do think it starts to become a matter of national concern if a great British company is being continually beaten up on international airwaves,” he told BBC Radio on June 10th. However, Reuters quoted Prime Minister David Cameron as saying, “This is an environmental catastrophe. BP needs to do everything it can to deal with the situation, and the U.K. government stands ready to help. I completely understand the U.S. government’s frustration.”

In a general sense, the governments are relatively oriented to the public interest, whereas BP, as a private corporation, has a fiduciary obligation to its stockholders.  Robert Reich referred to this obligation as a company’s “corporate social responsibility” on the Countdown with Keith Obermann show on MSNBC on June 14, 2010.  “Social” can admittedly be in reference to stockholders’ social concerns (though “social concerns” is rather vague); however, the term can also refer to society, which is larger than any group of stockholders. To BP’s management, it makes perfect sense in terms of corporate governance to declare and pay dividends as long as the company has enough resources to cover its actual and contingent liabilities related to the gulf.  Considering the billions that the company has in oil reserves, it could satisfy both. In an economic sense, the dichotomy may not make sense.  However, politically, there is resistance to the declaration and payment of dividends, and this “irrational” element is ignored by BP to its economic peril.  Essentially, the political reaction is challenging the right of the company to continue to exist. At the very least, the objection is that the company should not be run as normal.  In other words, the political claim is ultimately that BP has broken the social contract that legitimates its right to conduct business within the US.

Lest we have become too ahistoric, it might be worth our while to study the history of the modern corporation.  Originally, the modern joint-holding company was delegated a function to do for the public by a government.  If the company had enough left over after performing the function, it could give the surplus to the stockholders.  Through the twentieth century, the interests of the stockholders became increasingly central, eclipsing even the “delegated public function” aspect of the charters.  Essentially, a society gives a group of people permission to do a function. This implies that doing the function, and taking care of any adverse consequences caused by the company, are primary.  The political demand of the American governments is that dividends not be declared or paid until BP has rectified the Gulf region as required by law, societal norms, and ethical standards. From the standpoint of BP having been granted permission to operate in the US (leaving aside the billions in contracts from the US Government), the demand is not so much the product of irrational exuberance.

In effect, BP’s managers ignored systemic risk.  In being the closest we have to anyone able to solve the problem, BP is too big to fail. Managers at the company lied about being able to handle a major rupture. The MMS regulatory agency went along, having been coopted by the industry it was to regulate.  This is a failure of business as well as government.  All the emphasis on BP taking orders from the US Government in the wake of the rupture can be interpreted as “reaction formation” given the powerlessness felt in government having been so dominated by private interests ahistorically oriented to their stock price.  If the Gulf of Mexico seemed broken, this condition could be read as a symptom of a political-economic rupture.  I suspect that big business has gotten too big—taking too big risks, capturing governments, and acting with impunity.  As if the financial crisis of 2008 was not enough of a warning call, the oil spill of 2010 depicts too big to fail in very concrete terms.  Whether governments have sufficient power to reassume the driver’s seat in delegating public functions to private commercial associations depends on whether legislators have enough backbone to limit the size and wealth of big business.

Sources: http://www.nytimes.com/2010/06/11/business/11bp.html?hp
Countdown with Keith Obermann, MSNBC TV, June 21, 2010; Byran Walsh, “The Spreading Stain,” Time (June 21, 2010), pp. 51-59.

In the process whereby financial reform legislation made its way through Congress after the financial crisis of 2008, the U.S. House and Senate had different approaches concerning who would be required to go through a clearing house to buy or sell deriviative securities. According to Michael Masters, "The clearing house would stand in the middle of the transaction and guarantee both sides of the trade. If one counterparty to the transaction fails, then the central counterparty absorbs those losses, protecting the system as a whole from collapse."  Masters claims that "Wall Street firms hate this idea because their prodigious profits will dwindle when derivatives are traded in the light of day, letting their counterparties see the true costs. So Wall Street is pushing hard to exempt as many transactions as possible."  Given the culpability of Wall Street in the financial crisis, they were in no position to "push hard." That they did nonetheless is a telling sign of the underlying character, or lack thereof, "on the street."  Furthermore, that the representatives and senators were listening to them ought to cause the voters some concern.  Yet because of the reality of the banks' muscle on the hill, the power of the banks to exploit any loopholes in the final legislation should have been salient as the legislation made its way through Congress. This can be seen in whether to favor the House or Senate version.

According to Masters, "The Senate version of the clearing house requirement, which is currently the base text for the bill, includes a narrow, well-defined exemption that allows commercial end-users a complete exemption from clearing, while denying this exemption to financial players. The House language, however, would exempt anyone hedging "balance sheet risk." Since every financial player has a balance sheet, it is estimated that more than 50% of the outstanding derivatives would go uncleared under the House plan, compared to just 10% under the Senate version."  One might say: Ah, 50% is a pretty wide door--better go with the Senate version (assuming it could resist threats and favors from the banking lobby).

Masters explains the rationale for the Senate's version. There "is a critical policy distinction that must be made between commercial end-users like airlines, and financial entities like hedge funds. For a commercial end-user, risk arises naturally out of the ordinary conduct of business. For a financial entity, pricing and managing risk is their core business. As an example, an airline cannot fly without incurring the risk of wildly gyrating jet fuel prices. Allowing them to hedge their jet fuel exposure without a clearing requirement would provide stability for the airline, confidence for airline investors and ensure that the broad U.S. economy benefits from reliable airline service. A hedge fund, however, starts with no inherent risk. Its mission is to evaluate investment options, balancing risk and reward. If a hedge fund enters into a jet fuel derivatives contract on a bet that prices will increase, then it's nonsense to say that they are "hedging" when they subsequently enter into an offsetting deal to reduce the risk they voluntarily took on in the first place. These semantic charades can easily be carried to such extremes that every transaction a hedge fund enters is "hedging" something. An exemption for hedge funds serves no social purpose and, in fact, it puts our entire financial system at risk."  In other words, there are good business reasons for non-financial companies to be able to use derivatives to hedge for risk related to price volitility even if the companies cannot meet the clearing requirements. Of course, it could be asked what proportion of commercial use should but would not occur were such use subject to the clearing house requirements.  I don't know the answer to this question. I contend, however, that even if it is significant, the danger that the loophole would be exploited such that the financial system would once again be at risk outweighs any such inconvenience.  In other words, in reaching too far for perfect efficiency, we could unwittingly be inviting the irrational exuberance of the market to destroy the market mechanism itself.  We ought not fly too close to the sun or we might get burnt and fall to the ground. Masters concludes that the Senate language is "superior to the House's simply because it forces far more derivatives into the open." This may be so, but what would prevent a financial player from using a commercial user as a front to bypass the clearing requirements? Furthermore, there might be legislative language in the exemption that allows financial firms to obviate the clearing houses without even needing such a front.

In short, I contend that having any loopholes, or exeptions, is an unwise practice when we know (as Sen. Dick Durbin said) that the banking lobby owns Congress. We also know that managers and their lawyers are oriented to exploiting loopholes.  To expect otherwise is to tell a shark that it should not be a feeding machine.  That is, we must accept the nature of business for what it is, and not do what can reasonably be assumed to be taken advantage of.  It is like saying to sharks: those of you who do not eat any swimmers can go through the hole in the net and into the shore area.  It is just too dangerous to have a hole in the first place, even if there are some benefits to having it.

Source: http://money.cnn.com/2010/06/23/news/economy/congress_derivatives/index.htm

According to The New York Times, Wall Street bankers were busy working on how to weaken the regulations or otherwise profit from them before the ink was dry on the financial reform law of 2010 . First, regarding trying to profit from the new regulations, BOA, Wells Fargo and other big banks that were faced with new limits on fees associated with debit cards were imposing fees on checking accounts. Compelled to trade derivatives in the daylight of closely regulated clearinghouses rather than in murky over-the-counter markets, titans like J.P. Morgan Investment Bank and Goldman Sachs were building up their derivatives brokerage operations. Their goal was to make up any lost profits — and perhaps make even more money than before — by becoming matchmakers in the vast market for these instruments. That critics were pointing to them as a principal cause of the financial crisis made no difference to those bankers. Even when it comes to what is perhaps the biggest new rule — barring banks from making bets with their own money — banks found what they thought was a solution: allowing some traders to continue making those wagers as long as they also work with clients.

Lest one conclude from the banks’ stretegic responses that the new law passed in the wake of the financial crisis of 2008 goes strongly against their interests, it is important to remember that the reform is more geared to giving government officials adequate power to mop up a future mess than to enabling them to prevent one in the first place by clamping down on the banks. The devil is in the details. This in itself can be an opportunity for banking lobbyists to work over regulators who depend on information from the industry and can be swayed by legislators who have received campaign contributions and fund-raisers from the bankers. Regulators are tasked under the new law with writing the specific rules of the road governing limits on risk-taking by financial firms and previously unregulated trading. By leaving so much to the discretion of existing regulators, the new law is “a boon to Wall Street lobbyists, who will now be working behind the scenes to influence the regulators,” according to John Taylor, president & CEO of the National Community Reinvestment Coalition. Furthermore, in enforcement, there is evidence that regulators are apt to look the other way. The wave of predatory lending that sank the housing market, for example, could have been largely prevented if the Federal Reserve had enforced existing rules on mortgage lending, according to Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University.

Under the financial reform law of 2010, banks and other financial institutions are overseen by a council of  regulators. That group is charged with identifying the kinds of “systemic” risks that spun out of control in the collapse of Bear Stearns and Lehman Bros. in the financial panic of September 2008. But there’s little to be gained by entrusting that task to the same regulators who failed to spot the causes of the panic the first time, said Isaac, the former FDIC head. “If a bank went to the regulators and said, ‘We’ve got a good idea: we’re going to put our lending officers in charge of risk management,’ that bank would be put out of its misery immediately,” said Isaac. “That’s what the government just did. It put the regulators in charge of assessing their own performance. It’s a very bad system.” While the law creates a separate agency with a single consumer mandate, even it remains beholden to those regulators, who retain the power to veto its regulations and enforcement actions. That setup, said Taylor, could seriously hamper the board’s effectiveness. “That club of regulators is very insular, and usually in agreement,” he said. “They can kill serious reform, and the financial lobby remains much more influential with regulators than consumer advocates.”

The problem can be broadened by considering that President Obama brought to head his economic team people like Larry Summers, who while in the Clinton Administration lobbied against regulating derivatives, and Tim Geithner, who had been appointed as President of the New York Federal Reserve at the urging of Citigroup and its major stockholder. In other words, it is not just a matter of relying on the same regulators; the construction of the law involved the same advisors.  Indeed, that members of Congress listened to the banking lobby at all even as the banks were complicit in the financial crisis of 2008 can be viewed as going back to the same. At a fundamental level, the banking industry may have too much leverage over top government offiicals, whether legislators or regulators.

Sadly, according to Newsweek, “the bill does more to help regulators detect and defuse the next financial crisis than to actually stop it from happening. In that way, it’s like the difference between improving public health and improving medicine: The bill focuses on helping the doctors who figure out when you’re sick and how to get you better rather than on the conditions (sewer systems and air quality and hygiene standards and so on) that contribute to whether you get sick in the first place.” This might be because it is in the big bankers’ interest that the government come in and clean up, but not restrict them in the meantime.  In the 1980s, the financial sector’s share of total corporate profits ranged from about 10 to 20 percent. By 2004, it was about 35 percent. According to Newsweek, “What you get for that money is favors. The last financial crisis fades from memory and the public begins to focus on other things. Then the finance guys begin nudging. They hold some fundraisers for politicians, make some friends, explain how the regulations they’re under are onerous and unfair. And slowly, surely, those regulations come undone.”

In the wake of the financial crisis, the American people had a chance to brake up the banks too big for our republics, but even then the bankers were able to quietly get this option off the airwaves. I contend that the too big to fail systemic risk is actually greater with respect to the viability of the US than to the financial system. That is to say, the ability of Wall Street to dodge the bullet even when it was culpable for a near melt-down of the financial markets may mean that we are living in a plutocracy rather than a democracy—the latter being mere window-dressing. Even when Wall Street is “bad,” it owns Congress, according to Sen. Dick Durbin of Illinois.  This ought to tell us that the game is over, yet with regard to the regulators I suspect the games will go on for some time.

Sources:
http://www.msnbc.msn.com/id/38266914/ns/business-eye_on_the_economy/  http://www.newsweek.com/2010/07/15/five-problems-financial-reform-doesn-t-fix.html  http://www.cnbc.com/id/38272518

See Related:
http://euandus3.wordpress.com/2010/07/09/is-the-us-too-banker-friendly-relative-to-the-eu/
http://euandus3.wordpress.com/2010/06/23/regulating-financial-and-commercial-derivatives/

One of the perks of corporate office is the presumption of stature and legitimacy.  In other words, the general public typically brings all sorts of assumptions along when reading about the behavior of a CEO.  I contend that the reality of the person behind the curtain is far different from what is portrayed.  That is to say, at least with respect to how CEO's typically want to be viewed in terms of corporate responsibility, I suspect that the reality in the executive suites is far different.  In fact, the reality can be downright childish.  Richard Fuld, who was the CEO at Lehman Brothers, may well have behaved like a six year old when upset. Had the general public been given a view of Fuld's antics, we would have shaken our heads not simply out of utter disbelief that such immaturity could be in such a position, but also in recognition of the gap between public and private persona.  Such a gap is dangerous in a republic wherein the electorate is to hold the government in check (and the government in turn is charged with protecting the public and the market system itself from being compromised from firms too big to fail). 

One might argue that Richard Fuld was an exception--protected at Lehman by an enervated or compromised corporate governance system. One could point as well to Mark Thain, the CEO of Merrill Lynch, who in over-extended early morning merger talks with Ken Lewis, the CEO of Bank of America, was preoccupied with the matter of executive compensation. Merrill Lynch would have gone bankrupt at the open of business that morning, and Thain was pressuring Lewis to sign off on large bonuses for himself and his colleagues at the defunct Merrill Lynch. Even so, one could argue that Thain simply evinced a particularly selfish and greedy CEO who didn't have a good sense of priorities. What, then, if a group of Wall Street CEO's shrunk from responsibility even when the financial system itself may have hung in the balance?  It would not be a case of a rogue CEO acting narrowly in contradistinction to the example of J.P. Morgan in the panic of 1907.  Might it be that the age of corporate statemen had passed by the time of the crisis in 2008?  If so, might we be occastioned to taking mice to be men?  Such a practice would point to the need to recalibrate our standards.

On the weekend of September 13-14, 2008 before the Monday when Lehman Brothers declared bankrupcy and Bank of America agreed to purchase Merrill Lynch, Treasury Secretary Henry Paulson and the New York Federal Reserve President Tim Geithner summoned the CEO's of the major Wall Street banks (except Fuld) to the Federal Reserve building in New York City.  Paulson and Geithner told the assembled executives that they needed to figure out how to save Lehman because if that bank were to go under, the financial market itself would stand a good chance of collapsing.  He reminded the assembled CEO's that the process would entail a domino effect wherein their respective banks would fall, one by one in quick succession. Incredibly, the CEOs were in denial on whether their established institutions could indeed fall; the status quo has such staying power. Furthermore, the CEOs were slow to view the viability of the financial market itself as their responsibility, in spite of the fact that their own self-interest depended on it.  Incredibly, on the Friday night and Saturday, they tried to figure out how their firms could profit from picking over Lehman's remaining assets.  On the Saturday morning, they resorted to doing impressions of Paulson and Geithner and betting on a computer game on one of their blackberries (you might want to re-read this last sentence, as it is so incredible that men of such power and responsibility would behave like teenagers--and at a time of crisis no less!).  Finally on Sunday, Barclays offered to buy the financially viable part of Lehman and proposed a consortium funded by the other banks in the meeting to support Lehman's debt.   Even though Barclays should perhaps have agreed to join the consortium, the other banks were on the brink of agreeing to contribute at least a billion each to the consortium--essentially propping up the mistakes of one of their rivals while letting another rival (Barclays) to walk away with the "good" Lehman.  The British government ended up refusing to allow Barclays to buy even the "good" Lehman, making the CEO's look good in comparison.

I have to give the CEOs credit for agreeing to the consortium. They would have been acting as a group as J.P. Morgan had acted in 1907.  However, the antics of the modern day CEOs during the first half of the weekend evince a childish behavior that is difficult to reconcile with men making millions a year and running firms too big to fail.  The financial system hung in the balance and the CEO's of the banks too big to fail were literally behaving like teenagers until Jamie Dimon of JP Morgan exercised some statesmanship (similar to JP himself in 1907) by stepping up to the plate and asking the other bankers to contribute a billion each too.

Diamond notwithstanding, I have to conclude that what we are led to believe concerning the men and women behind the CEO label is far too convenient for them may be inaccurate, and perhaps even manufactured as though a sort of brand management. Just as candidates for elected office are sold like shinny products, we may be under an illusion with regard to business "leaders."  Andrew Sorkin, author of Too Big to Fail, which is my source here (see pp. 330ff), said on a television interview that he (and we) didn't know much about what was going on in the banks during the crisis "because they didn't want us to know" (Tavis Smiley Show, PBS, 11/9/09).  That is, it is no accident, kein zufall, that we will likely remain asleep or ignorant to the nature of the man behind the curtain.  It is in the Wizard's interest that the curtain remain closed from our view. However, thainks to glimpses, we can investigate just who the people are who run firms too big to fail. It can perhaps be said that promotional processes from middle to upper management should be re-examined from outside of the executive suite.  I suspect that the extant promotions are too often simply matters of connections, friendships and power within management, rather than of maturity.

A year after the financial crisis of 2008, Lloyd Blankfein, the CEO of Goldman Sachs,  found himself vilified for his firm’s quick return to risky trading in spite of its new bank holding company status. Populist resentment at the time was especially pitted against the hefty bonuses from the trades. Also, people were upset about the benefits that the bank had obtained from the decisions of its alums in the U.S. Government—specifically, in the U.S. Department of the Treatury. For instance, Goldman Sachs and other AIG counterparties got a the dollar-for-dollar payout from AIG thanks to an infusion of funds for that specific purpose by Treasury. Regardless, in an interview with the London Times, the highest-paid CEO (at least in the financial sector) dismissed such talk and defended his money-making machine and its compensation.  In addition to being the engine of economic recovery, according to Blankfein, Goldman Sachs provides a social function in making capital available to companies so they can expand. Stunningly, he adds, “I’m doing God’s work.”[i]  Such a claim is a far cry indeed from Thomas Jefferson’s warning that banking institutions are more dangerous to our liberties than standing armies.[ii]  Perhaps God intends to undo our liberties by bailing out the banks.

Besides these rather obvious problems with Blankfein's religious claim is his presumption to know what God's work is, and, furthermore, that he is doing it.   Even though a feckless system of corporate governance can enable a CEO to essentially function as his or her own boss, including doing the board's job of evaluating his or her own performance, it is a tall order for a human being to be able to evaluate his performance as God's work.   To be sure, it is possible that God is an intelligent being that bestows favor on his golden stewards for doing His work.

Lloyd Blankfein may have been involved in two conflicts of interest: 1) that of having excessive power over the board whose principal task it is to oversee him, 2) having communicated with GS alums in high posts in the U.S. Government (e.g., Hank Paulson) and perhaps having them enact policies on GS's behalf.   It may be that institutional and personal conflicts of interests can become so ubiquitous that they are simply not seen by the culprits. Furthermore, it could be that the denial enabled by a tacit presumptuousness is like a white movie screen on which even doing God's work can be projected. How ironic it is, that sordid proprietary interest could operate not merely under the subterfuge of being a neutral "market-maker," but also as God's work. Such work is two degrees of freedom away from squalid greed. So it is remarkable that the two could become conflated in a mind.

Reacting to the debt troubles of Dubai World (which was carrying $59 billion in debt in 2009), the director general of the Dubai Department of Finance, Abdulrahman al-Saleh, said  “Creditors need to take part of the responsibility for their decision to lend to the companies. They think Dubai World is part of the government, which is not correct.”  This sentence strikes me as odd.  Al-Saleh was suggesting that in deciding to make a loan to a company, a banker takes a risk, which entails the possibility of working with the company if it comes up short in cash.  Is such flexibility in the vocabulary of the typical loan officer, much less in the culture of major banks?  I doubt it.

On the same week that Dubai World’s problems were being made public, the Obama administration announced plans to pressure mortgage companies to reduce payments for many more troubled homeowners, as evidence was mounting that a $75 billion government-financed effort to stem foreclosures was foundering.  "The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said in an interview. “Some of the firms ought to be embarrassed, and they will be.”  Even as lenders had accelerated the pace at which they were reducing mortgage payments for borrowers, a vast majority of loans modified through the program remained in a trial stage lasting up to five months, and only a tiny fraction had been made permanent. Mr. Barr said that the government would try to use shame as a corrective, publicly naming those institutions that move too slowly to permanently lower mortgage payments.  However, shaming is not the only weapon in the government’s arsenal. 

The Treasury Department waited until reductions were permanent before paying cash incentives that it had promised to mortgage companies that lowered loan payments. “They’re not getting a penny from the federal government until they move forward,” Mr. Barr said.  A week after Barr’s statement, the Treasury Department said it would withhold payments from mortgage companies that weren't doing enough to make the changes permanent. ”We now must refocus our efforts on the conversion phase to ensure that borrowers and servicers know what their responsibilities are in converting trial modifications to permanent ones,” Phyllis Caldwell, who was named to lead the Treasury Department’s homeownership preservation office, said in a statement.  So here we find that dreaded word—responsibility—as if it applied to the mortgage issuers as well as the homeowners.  Considering Senator Dick Durbin’s statement that the banking industry owns Congress (which he said after the industry’s lobby effectively scuttled a bill to allow judges to adjust mortgage terms for homeowners in trouble—even as the banks played a role in the bad mortgages), it is not surprising that even two years later, little benefit had come to mortgage borrowers from the U.S. Government, even as the banks had been rescued by TARP funds.

The banking industry has been more powerful, even though it was at least partially complicit in the crisis. Of course, Wall Street bankers have instinctively resisted claims that they were part of the problem that led to the financial crisis in September of 2008. Al-Saleh’s admonition to lenders that the bankers in his country step up to the plate was ignored in favor of the mantra, “it's the other guy’s fault so why should I pay?  I'm not budging.”  This is the mentality of a spoiled child.  The rest of us don’t see it as such when it applies to people in expensive suits because we are too impressed with the trappings of money and power.  As long as bankers get away with making their own rules in the halls of governments, the power ties will remain as though undisciplined children.

Sources: http://www.nytimes.com/2009/11/30/business/global/30dubai.html?ref=world ; http://www.nytimes.com/2009/11/29/business/economy/29modify.html?scp=1&sq=pressure%20mortgage%20companies&st=Search ; http://www.msnbc.msn.com/id/34204856/ns/business-real_estate/

The financial reform bill approved in December, 2009 by the US House of Representatives proposed to regulate the financial industry and keep firms from growing “too big to fail.” The bill can be likened to a ship made of Swiss cheeze, yet seemingly seaworthy. A key intention of the bill was to gain control over the vast market in “over the counter” derivatives by forcing trading onto open exchanges, where regulators can monitor it. Unregulated derivatives were behind much of the havoc that nearly brought down the financial system in 2008, including the subprime-mortgage-backed securities that put many firms underwater and the credit default swaps sold by AIG, the giant insurance company that sucked up about $180 billion in bailout money. The $592 trillion global market in these mostly unmonitored derivatives remained in 2009 among the most profitable businesses for the biggest banks—Goldman Sachs, JPMorgan Chase, Citigroup, Bank of America, and Morgan Stanley—and Wall Street doesn’t want Washington tampering with it. Early versions of Frank’s bill allowed many derivatives to continue trading off exchanges. The bill, Frank wrote, “could be subject to manipulation” by “clever financial firms” seeking to evade a requirement that they trade derivatives on open exchanges.

The story of how those loopholes got into the derivatives bill, even with Frank at the helm and the wind of public outrage at his back, shows just how powerful the Wall Street banking lobby remained nonetheless—and just how complex Wall Street’s financial instruments had become. Many of the key lobbyists were in 2009 in the same gang that helped get us into this mess before, and they were spending huge sums a year after the near meltdown. In the first three quarters of 2009, financial-industry interests  spent $344 million on lobbying efforts, putting them on pace to break all records. This did not include political donations and issue ads. Even more impressive was the lobbying strategy that money was buying. The banks sought to stay in the background and put their corporate customers—a who’s who of American business, including Apple, Whirlpool, and John Deere—out in front of the campaign. “This is an orchestrated, well-funded effort by the banks to manipulate our legislation and leave no fingerprints,” says a congressional staffer involved in drafting the legislation. The financial industry argued that curbs on derivatives do hurt just Wall Street, but also the corporations in Main Street America—the “end users” —that need them to hedge risks.  However, the more custom-made and out of public sight a derivative is, the harder it is for investors—and regulators—to assess its fair value and real risk. This makes it easier for the banks to charge a large “spread” and earn big profits. Frank heatedly denied that he'd been fooled, though he conceded he was catching up on some of the details of the bills he was pushing through. “I’ve become responsible for dealing with a lot of things that are new to me. I didn’t have a great deal of knowledge. I’ve been relying on a whole lot of people,” Frank said. In allowing some exemptions from exchange trading, Frank said he was merely accommodating the corporate end users—not Wall Street—who want to continue doing these private trades in derivatives.  The Wall Street lobby didn’t give up. After Frank had toughened up his stance on derivatives, the lobby tried to redefine what certain kinds of exchanges do.

The money that the industry can use to mollify congressional critics and bolster allies was not the only problem. The problem was even more intractable. Both Frank and his staff (and the corresponding committee in the US Senate) relied on the expertise of the banking industry in the fashioning of regulation for the industry.  Frank admitted that he didn’t know enough to keep on top of the drafts submitted by the industry (and end-users).  Additionally, it was difficult for him and his staff to assess where the industry’s “recommendations” were more “convenient” (meaning self-serving for the banks) than informational.   The financial instruments (e.g., derivatives based on mortgages) were at the time so complicated that congressional staffers who wrote the legislation depended on drafts submitted by the industry itself without being able to adequately screen them for bias.  There is an inherent conflict of interest in an industry even providing information. Therefore, I wonder whether the practice was worth its benefits to congressional staffers. 

The case seems to me like that of having a wolf provide the sketches for the design of the chicken koop, as if the design were an objective plan without any holes.   Even so, without the information from the industry with the vested interest, legislative staffs often do not feel competent to legislate on the complex markets of modern finance.  Indeed, they may not be, given the complexity out there.  But that is not a given.  We miss this point. To reduce the informational asymetry, Congress could direct that the markets be simplified to what they and the regulatory agencies could understand and thus regulate effectively. Opponents of the House bill claimed that the changes ensuing from the bill would limit consumer choice and stunt financial market innovation. Shortly after the House bill passed, President Obama suggested these risks are worth taking.

While applauding House passage of overhaul legislation, the President expressed frustration with banks that were helped by a taxpayer bailout and even as they were “fighting tooth and nail with their lobbyists” against new government controls.  The bank lobbyists spent more than $300 million in 2009 trying to scuttle the bill.  This alone should be enough to shut every congressional office to the lobbyists.  How widespread is the fecklessness!  As the wake of the bill’s passage, Obama said the economy was only then beginning to recover from the “irresponsibility” of Wall Street institutions that “gambled on risky loans and complex financial products” in pursuit of short-term profits and big bonuses with little regard for long-term consequences. “Americans don’t choose to be victimized by mysterious fees, changing terms and pages and pages of fine print. And while innovation should be encouraged, risky schemes that threaten our entire economy should not,” he said. “We can’t afford to let the same phony arguments and bad habits of Washington kill financial reform and leave American consumers and our economy vulnerable to another meltdown.”

So where were our legislators on this point?  Missing in action, most of them.  However much Obama's remarks can serve as a palliative, it must be admitted that the President could have gotten on the banks and refuse to sign a final bill containing deflating loopholes gained by the efforts of the lobby with a vested interest in the legislation.   I don’t believe the President would have risked his re-election contributions from Wall Street by telling Congress to be firmer in resisting the banker taskmasters.  Hence, the U.S. Government is unlikely to take on the very existence of the banks too big to fail even as the most profitable of them quickly returned to risky trading on their own accounts.

Too often, congressional legislators (and the President) wince when it counts, ignoring the inherent conflict of interest in the industry’s warning of Armegeddon.  We need to accept the fact that ery reform has a cost, and that “reform” does not mean “catastrophe.”  If we capitulate to the wolves because there might be a cost otherwise, we miss the greater cost in capitulating.  That cost is not only economic, for it includes the selling of ourselves and our government to the highest bidder and the loudest bully.  When I look around the world, I see fecklessness at home.

By comparison, the British and French states of the E.U. set a 50% windfall tax on ALL banker bonuses within their respective states.   Throughout the U.S., it has been difficult simply dealing with the bonuses of the bankers at the banks that were bailed out; we were so afraid that the credit markets would collapse from a tax or that we shouldn’t touch the other bonuses.  Treasury limited the cash compensation for executives at companies that received the largest taxpayer bailouts to $500,000 and delayed some other payouts. The 25th through the 100th top earners at Citigroup, GMAC, American International Group and General Motors had to take more than half their compensation in stock, and at least half had to be delayed for three or more years. About 12 executives were granted exemptions to the $500,000 cash cap because they were necessary for the companies to “thrive, be able to compete, and not lose key people.”  The European industry-wide approach was stronger, and less apt to result in “talent poaching” that was likely to occur where only TARP reciprients are targeted.

Why is that we were convinced that we couldn't or shouldn’t go beyond the TARP reciprients in limiting exorbitant executive compensation?  Is imposing compensation (in all its forms) limits to protect the market from firms too big to fail really beyond the pale?  Is it really so much a threat to economic freedom? Certainly, it is a legitimate role of a government to protect the viability of the market.  The lack of any enacted windfall tax on bank bonuses (or compensation) in the Congress in 2009 or 2010 intimates the subterranean power of Wall Street in Washington.  Indeed, according to The New York Times, “heeding complaints from banks, the House rejected an effort to allow bankruptcy judges to restructure mortgage payments, a plan that has passed the House before but not the Senate.”  When the same thing happened in the U.S. Senate, Sen. Dick Durbin said publically that the banking lobby owns Congress.  House members also agreed to relax some of the proposed new controls on trading in derivatives. Rather than subject all over-the-counter derivatives to open trading, the bill would have subjected such derivatives only if they were traded between Wall Street firms, or with a major player like AIG. But the transactions between dealers and customers will remain largely hidden, so customers will not be able to compare the prices they are being charged with the prices charged to other customers.  That’s nice for the banks.  We miss this point, paying attention instead to speeches.  Words.

We are not keeping our eyes on the ball, folks; rather, we all too easily allow ourselves to get distracted.  In watering down financial reform, we agree to construct fake walls  on what reform is viable and constructive.  We convince ourselves that we must play inside the pen because insiders have told us that we should. We take harsh words against the pen on our behalf as tantamount to tearing it down.   In actuality, the words are a subterfuge meant to assuage us so we don’t vote differently in the future.  The wolves know that mere words can’t tear down the walls they have directed our representatives to observe.  We have become like herd animals, and our leaders like subterfuges.  It is no wonder that “real change” contrary to the vested interests has been restrained at best.  If a new consumer protection agency is the high-water mark of reform (i.e., banks too big to fail being allowed to go on…even as they have returned to risky trades for much of their 2009 income), we really do deserve the next financial crisis.  …or can a speech going after the financial industry obviate such a thing from happening again?

Sources: http://www.newsweek.com/id/225781 ; http://www.nytimes.com/2009/12/11/business/global/11bonus.html?_r=1&ref=world ; http://www.msnbc.msn.com/id/34380551/ns/business-us_business/ ; http://www.nytimes.com/2009/12/12/business/12regulate.html?_r=1&ref=business ; http://www.msnbc.msn.com/id/34393630/ns/politics-white_house/

Paul A. Samuelson, the first American Nobel laureate in economics and the foremost academic economist of the 20th century, died at the end of 2009 at 94.  Samuelson was credited with changing the academic discipline of economics, according to The New York Times,  ”from one that ruminates about economic issues to one that solves problems, answering questions about cause and effect with mathematical rigor and clarity.”  Essentially, he redefined twentieth century economics. Mathematics had already been employed by social scientists, but Dr. Samuelson brought the discipline into the mainstream of economic thinking. His early work, for example, presented a unified mathematical structure for predicting how businesses and households alike would respond to changes in economic forces, how changes in wage rates would affect employment, and how tax rate changes would affect tax collections.  He developed the rudimentary mathematics of business cycles with a model, called the multiplier-accelerator, that captured the inherent tendency of market economies to fluctuate.  Mathematical formuli that Wall Street analysts use to trade options and other complicated securities (derivatives) have come from his work (FYI: derivatives too complicated for outsiders such as the government to understand/regulate were at the center of the financial crisis in 2008).

While The New York Times article covers his career in a positive light, I believe the picture is more complicated—and telling of twentieth-century American society.  At the surface, the tale seems to center on a dichotomy—the Keynesian liberal against his conservative monetarist friend, Milton Friedman.  Perhaps the principal issue between them was whether market equilibrium could rest at full employment (i.e., without government help).  Samuelson’s own work on the inherent volitility of markets would suggest that the market mechanism does not necessarily reach an equilibrium, even at less than full employment.  As we saw in September of 2008, a market can collapse from within.  I am reminded of Alan Greenspan’s testimony before Congress shortly thereafter, when he admitted a fundamental flaw in his free market paradigm assumptions.  Clearly, more thought is needed into the nature of a market and how its basic contours can be altered; government regulation alone is not sufficient.

Unfortunately, such “big picture” theorizing was on the wan in twentieth-century economic thought, which focused on narrow problems using technical tools such as mathematical formulas.  To be sure, Samuelson’s technical work gives us reassurance that the market contains a fluctuating element.  However, the reform of an economic system at a basic level is not simply the sum of a bunch of smaller solved problems.   I submit that while mathematics is useful for problem-solving, more is needed to understand our economic system and alter the basic contours of the market mechanism.

  Fundamentally, none of the social sciences is really a science.  To presume the certainty of natural science onto any of them is inherently limited and potentially risky.  To be sure, value can be gained from applying quantitative tools to look at limited problems, but the inherent indeterminacy of human macro systems makes the scientific approach ultimately futile from the macro standpoint of the social “sciences.”  Their phenomena, in other words, are not of the sort that can be measured andpredicted like the speed of a comet in space or a chemical reaction in the isolated environment of a lab.  Economic, social and political systems just aren’t like that.   Explanation, rather than prediction, is primary where human indeterminacy is so salient.

Another way of relativising the “mathematical problem-solving” orientation of 20th century economics is to look at different levels of thinking.  In the wake of the problem-solving orientation, business schools regularly tout “critical thinking,” which is really just problem-solving.  You wouldn’t know it, but higher forms of thinking do exist—namely, synthetic and analytical reasoning.   To treat problem-solving as the litmus test for a discipline is to reduce that discipline from what it could be, academically speaking; it is to short-change it by forcing it into the low-ceilinged box of practicality.  It is to put blinders on. Samuelson’s mathematical axis inadvertantly made the discipline of economics more oriented to solve particular problems than it had been in the past.  Consider by contrast the work of Smith, Marx, Hayak, and Veblen—not a plus or minus sign among them, yet their work addresses economic at the level of systems.  Moreover, their thought transcends mathmatic problem-solving.

I am not dismissing the value of solving specific problems, and Dr. Samuelson deserves credit for providing the tools for it; rather, I am suggesting that the legacy of the twentieth century in general and economic “science” in particular might be a reductionism to a technical orientation to solve particular problems.  That is to say, empiricism as hegemonic.  Problem-solving as the principal activity (and reasoning).  Such an orientation is rather narrow, and therefore not apt to survive on top indefinitely.  The “big picture” questions raised by the financial crisis of 2008 include matters like “too big to fail” and the viability of the market-mechanism itself that go beyond solving particular problems.  So I would not be surprised if a return to the theoretical economy (and political economy, for mathematics in the latter has been part of the wedge that has artificially disected the two) were not too far off.   The twentieth-century is leaving us.  I for one have few regrets over its passing; I think it will go down in history as decadent (meaning decaying from within..the 1970’s being its epitome).  What Samuelson did for economics is more a function of his era than anything else.   Such value is limited.

Source: http://www.nytimes.com/2009/12/14/business/economy/14samuelson.html?

When he was running for US President, Barak Obama said that the financial crisis provided an opportunity for financial system reform beyond that which is in the interest of the big banks because the power of the latter is temporarily eclipsed and the US Government can take advantage of that.  His assumption is that during normal times, the banking industry essentially owns the Congress (Sen Dick Durbin’s statement just after the banking lobby defeated a foreclosure bill in the US Senate in 2009).  Sadly, the government did not use the eclipse; rather, it has been using the appearance of power and direction in the relumed post-crisis period to engage in window-dressing to assuage populist anger at the banks.

 Asserting that it “is among the strongest banks in the industry,” Citigroup announced in December, 2009 that it would soon repay $20 billion of federal bailout money. This from a bank that was in the red for most of the preceding two years, that was expected to limp through 2010 amid a torrent of loan losses, that saw its stock price close after the announcement at a measly $3.70 a share — and that, like other big banks, was still reluctant to lend. Citigroup’s planned exit from the bailout — like Bank of America’s earlier this month — would be welcome if the banks were the picture of health. But their main motive was to get out from under the bailout’s pay caps and other restraints. Perhaps the bankers were motivated to attract talent;  perhaps they were acting in their personal financial interests.  The Treasury Department’s approval was a grim reminder of the political power of the banks, even as the economy they did so much to damage continued at the time to struggle and the banks have benefited from taxpayer money.

Big bank profits, for instance, still came mostly courtesy of taxpayers. Their trading earnings were financed by more than a trillion dollars’ worth of cheap loans from the Federal Reserve, for which some of their most noxious assets were collateral. They benefitted from immense federal loan guarantees, but they were not lending much. Lending to business, notably, was very tight.  Barak Obama’s “urging” the banks to lend more to small business was not apt to be taken seriously by the big banks, given their financial power.   To exort banks to be good “corporate citizens” is only to twist “citzen” beyond its pale.

Let’s be clear. Organizations are not citizens.  For one thing, they can’t vote.  Exxon can’t mail in its ballot for president.  Nor can it be drafted to fight (rather, it can receive military contracts; its lobby knows how to procure those).  Moreover, they are designed (real citizens are not “designed”) to retain income without limit.  Extrinsic normative claims on the organizational machines do not register in the corporate calculus unless there is a financial cost.

Being called to the “woodshed” at a White House meeting is mere political theatre—something the bankers who bothered to attend in person must have known was something merely to sit through.  Some of the biggest recipients of taxpayers’ money, including Citigroup and Goldman Sachs, didn’t even bother making the extra effort to get there ahead of time to avoid the predictable winter weather that grounded their flights.  The acela train from NYC was running on time, yet the CEOs cited flight delays as making it impossible for them to attend in person.  Perhaps the CEOs correctly determined that Barak Obama’s meeting was mere political theatre.  The banking lobby was surely not being distracted from the financial reform legislation making its way through Congress.  That lobby has gained significant loopholes in the House’s passed bill (see my post on the House bill).  Aside from the loopholes (such as derivatives still not subject to regulation!), the apparently “strong” provisions of that bill are vulnerable to being gamed. The Senate, which is unlikely to pass its version of the deal until next year, should explore more direct measures, like banning banks beyond a certain size, measured by their liabilities. If we have learned anything over the last couple of years, it is that banks that are too big to fail pose too much of a risk to the economy. Any serious effort to reform the financial system must ensure that no such banks exist.  But can you imagine our elected officials having the guts to split up Goldman Sachs?  Can you imagine what that bank would do to avoid such a fate?  … and yet such private power is not a threat to a republic?   As voters, we are asleep at the wheel, too easily taken in by the theatrics of impotent politicians.

In general terms, it is ironic that the banks too big to fail may be even more of a risk after the financial crisis.  What profits the banks have been making have come mostly from trading. Many big banks were happy to depend on the lifeline from the Fed and hang onto their toxic assets hoping for a rebound in prices.  Crucially in terms of the systemic risk in “too big to fail,” the whole system has grown more concentrated since the crisis. Bank of America was considered too big to fail before the meltdown. Since then, it has acquired Merrill Lynch. Wells Fargo took over Wachovia. And JPMorgan Chase gobbled up Bear Stearns.  If the goal is to reduce the number of huge banks that taxpayers must rescue at any cost, the US Goverment has been moving in the wrong direction. The growth of the biggest banks ensures that the next bailout will have to be even bigger. These banks will be more likely to take on excessive risk because they have the implicit assurance of rescue.  In short, there is even more systemic risk after the financial crisis of 2008.  Creating a new consumer protection agency is a feckless attempt by the US Government to show some muscle to face entrenched (and even more powerful) financial interests on Wall St.  Even giving the government the power to deal with banks deemed too risky to the financial market itself does not guarantee that the power will be used.  Consider, for example, the lack of enforcement of anti-trust law.  For a comparison, look at the EU—not only in terms of going after big companies like Microsoft, but big banker bonuses.   In the US, we much face the fact that the big banks are on top.  If what is good for Goldman Sachs or Citigroup is not necessarily good for us, the American people, then there is a tremendous systemic risk for us in being appeased by Barak Obama’s public “scolding” of Wall Street and by the Swiss-cheeze financial reform bill making its way through Congress.  Neither branch is taking seriously the question of the existence itself of the banks too big to fail.  Moreover, the question of whether large concentrations of private power have become a threat to our republic—on account not only of the ability of a big bank to shaft its customers, but also of the relative power of the banks and their lobby over our government—has effectively been sidelined.   It as as though popular sovereignty here means charting a ship’s course without looking beyond the bow.   Some of the wealthy passenagers have told us: don’t look out there!  Don’t ask the real questions!  And we, being reduced to unconscious herd animals, happily comply and stiffle our anguish because we feel the big banks have already won.

Adapted from: http://www.nytimes.com/2009/12/15/opinion/15tue1.html

"In Beirut, gunfire broke out and crowds of people waved Egyptian flags. In Yemen, they gathered in front of the Egyptian Embassy chanting, 'Wake up rulers, Mubarak fell today.' In Gaza, they fired shots in the air and set off fireworks. . . . [However,] in a telling sign of the divide between the rulers and the ruled, the region’s leaders, presidents and monarchs remained largely silent." This depiction by The New York Times of ripple effects across the Middle East in the wake of the resignation of Egypt's Mubarak in February, 2011 intimates the hoped-for and feared possibility that the popular unrest could spread.  Moreover, the entire world, which had been been glued to the events unfolding in Cairo, wondered if a domino effect might be in store in countries under autocratic rule. Indeed, The New York Times wrote of a possible domino effect quite explicitly: "The popular uprising that started . . . in Tunisa had claimed its second autocratic government, this time in the largest country in the Arab world. With more protests planned in coming days, some governments were clearly worried they could be next." But do autocratic governments fall like dominos?  That is, is revolution contagious? Fawaz Traboulsi, a prominent Lebanese writer and columnist, thought so in the days following Mubarak's resignation. “All the regimes are shaking now . . . They are becoming more and more fragile. This is just the beginning.” In Bahrain, King Hamad Bin Isa al-Khalifa apparently thought so too, for he ordered the equivalent of $2,650 be given to every Bahraini family a few days before a planned "Day of Rage" protest. “Arab people discovered their ability to make change,” said Nabeel Rajab, a human rights activist in Bahrain. “And with Egypt in the leadership once again, the change will reach all the Arab world.” In Yemen, President Ali Abdullah Saleh announced he would suspend constitutional amendments that allow him to remain in his office for life. He also raised salaries for the military and civil servants and cut income taxes in half. In Algeria, the government promised to lift the state of emergency that had been in effect since 1992. To be sure, nineteen years is a rather long time for an emergency.  Such efforts can be likened to building up wetlands or widening a beach to take the wind out of the hurricane out at sea should it hit. In other words, it appears that there was "revolution watch" in effect for the Middle East in the wake of the fall of the Egyptian regime. One might reasonably question, however, whether revolutions are contagious.

It could be that autocracy itself had been weakened by the success of the protests in Egypt.  On the other hand, there had been revolutions before and dictatorship was not evicerated from the face of the earth. The belief that the Tunesian and Egyptian revolutions were the start of a wave that would flood all autocratic powers in the Middle East (or the world) might also consider that even autocratic states differ in their respective internal conditions. To use the hurricane analogy, some beaches are better protected than others. If the unrest in Tunesia and Egypt were linked in such a way that other countries could be impacted internally, the ensuing domino effect could perhaps be compared to that among Wall Street banks in September 2008.  The collapse of Bear Stearns, Lehman Brothers, and Merrill Lynch as independent or viable going concerns contained a momentum that was beginning to bring down Morgan Stanley and threaten even Goldman Sachs when the ex-CEO of Goldman Sachs at Treasury effectively pushed for the construction of a fortified sand-dune (TARP) a.k.a. an infusion of funds into the remaining banks from the U.S. Government and the Federal Reserve.  As a result, the force of the strengthening winds ceased to intensify and began to diminish, leaving the economy in a long rainy season (i.e., a recession and a subsequent nearly jobless recovery).

In the wake of the fall of the Egyptian regime, were the other regimes in the Middle East like Morgan Stanley and Goldman Sachs after Lehman Brothers declared bankrupcy?  In other words, are autocratic regimes subject to a "run on the bank" in another? If so, there would still be a notable difference between the big banks and the governments.  Namely, the banks were deemed too big to fail, while the autocratic rulers were deemed too powerful to rule. That is to say, the continued viability of the Wall Street pillars was deemed essential to the world economy, while it was thought in the wake of the Egyptian regime of Mubarak that the world was better off less one autocratic regime. Hence there would not be likely to be a TARP program arranged to prop up dictators. Even with this difference noted, I contend that both big banks and big dictators are too big to exist in a world that values freedom and individual rights. Perhaps we ought to have been cheering the domino effect on Wall Street just as we cheered the fall of the Tunesian and Egyptian dictators. In both cases, destabilization that could lead to the collapse of the global economy and civic order would of course need to be avoided.  However, I contend that the U.S. Government could have intervened to maintain order on Wall Street by assisting as the big banks split into pieces, none of which being too big to fail and thus more in the public interest than retaining the big banks as such.  In the case of public autocratic regimes, their demise and replacement can typically be handled domestically, as in the cases of Tunesia and Egypt, rather than by an international organization such as the U.N.

In general terms, the "run on the bank" in Tunesia and Egypt may or may not be contagious in its nature, yet a consideration of the possibility of a domino effect can remind us of the domino effect that we witnessed in September of 2008 on Wall Street. Making this connection might prompt us to ask whether autocratic governments and big banks aren't both too big to exist. In other words, the collapse of one badly run bank after another and the subsequent need to deal with the question of such banks as going concerns can perhaps be likened to the collapse of one badly run government after another.  Was the world finally noticing around the end of the first decade (and the beginning of the second) of the twenty-first century that enormous concentrations of private capital (and thus power) and of public autocratic authority were not necessarily givens, and thus could, and perhaps should, be taken down? In other words, were long-standing givens finally seen as replacable?  The world was stunned when huge investment banks that had been around for more than a century were suddenly collapsing, just as the world was stunned when the government of the largest Middle Eastern country suddenly fell after two weeks of popular protests. Pillars, even those that are thought vital, can indeed fall, and the world can discover through the experiences that they are not essential--and they might even be bad for the public good. Surely this is the sense of the free world concerning autocratic governments, yet we are less convinced concerning the danger in continuing to allow banks too big to fail to continue to exist as they have for decades. In both cases, the domino effect may be natural and good, provided it is managed so public order does not collapse in the process. 

Source: http://www.nytimes.com/2011/02/12/world/middleeast/12arabs.html?_r=1&ref=todayspaper