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According to The New York Times, even after taxpayers rescued Citigroup, regulators at the New York Federal Reserve failed to monitor the company adequately. The regulators, although adequately staffed and proficient in training, failed to move swiftly as the bank’s financial condition deteriorated from as early as 2005, and were overly optimistic about the bank’s prospects as late as December, 2009. From 2006 to 2007, decisions on poorly underwritten loans were changed from “turned down” to “approved.” As many as 80 percent of the loans that Citigroup sold to Fannie Mae, Ginnie Mae and other investors were defective. “Although the dedicated supervisory team is well-qualified and generally has sound knowledge of the organization, there have been significant weaknesses in the execution of the supervisory program,” according to one excerpt of the 2009 review. Tim Geithner, who as president of the New York Fed from 2003 to 2008 was in charge of overseeing Citigroup, went on to become the US Secretary of the Treasury.

In questioning a panel testifying before the Financial Crisis Inquiry Commission on April 7, 2010, Brooksley E. Born, the former regulator in the Clinton administration who had lost the battle over derivatives regulation to Alan Greenspan, Robert Rubin, and Larry Summers, called on Greenspan in his testimony to defend his longtime deregulatory bent. “The Fed utterly failed to prevent the financial crisis,” she said. She went on to claim, “The Fed and the banking regulators failed to prevent the housing bubble. They failed to prevent the predatory lending scandal. They failed to prevent our biggest banks and bank holding companies from engaging in activities that would bring them to the verge of collapse without massive taxpayer bailouts… . Didn’t the Federal Reserve fail to meet its mandates, fail to meet it responsibilities?” Greenspan replied that there was a failure: an underestimation of the “state and extent” of financial risks and the ability of private counterparties to assess them, but he added that, “(t)he notion that somehow my views on regulation were predominant and effective at influencing the Congress is something you may have perceived,” he said. “But it didn’t look that way from my point of view.” However, according to other accounts, the trioka of Summers, Rubin and Greenspan had gone after Born for wanted to regulate the derivatives (see, for example, Sorkin’s Too Big To Fail). The three did indeed lobby Congress in an effort to sabatage Born’s proposal. Besides reporting this, Sorkin also points out that Citigroup’s CEO and its major stockholder were instrumental in getting Geithner appointed as President of the New York Fed. A coincidence with the overly optimistic view of the Fed’s regulators regarding Citi?

In questioning Robert Rubin on April 8th, Born (and other commissioners) asked why derivatives were kept unregulated. Rubin replied that the bankers were strongly opposed to such regulation, and they were able to effect their stand in Congress. Rubin did not go into the efforts of him, Summers and Greenspan to lobby Congress to keep the instruments unregulated; instead, he claimed that he favored regulating the derivatives even when he was at Goldman Sachs supervising the bank’s trading desk, and that when at Treasury he was merely concerned that regulating the instruments under the existing regulatory structure could cause delaying legal challenges. While Rubin’s frankness concerning the influence of the bankers in the US Government is useful, his testimony regarding himself seems less than forthcoming. Presumably he could have lobbied Congress as the Treasury Secretary for a new regulatory authority to regulate the derivatives on a solid legal basis. Instead, he lobbied against Born’s efforts to get the instruments regulated. He admitted that the financial sector would have been strongly opposed to such a regulatory authority. Also, he had been on the board of Citigroup and an executive at Goldman Sachs. The conflict of interest is too strong in his case for his asseverations that he had always acted in favor of regulating the instruments to be believable. His “worry of legal challenges” strikes me as a technical excuse that he was using as a subterfuge to “explain” his opposition to Born’s efforts to regulate the derivatives. Doubtless he could count on the American public and its media for not digging sufficiently to expose his duplicity. That is to say, it is likely that Rubin got away with protecting his ex-bank’s interests when he was Secretary of the Treasury and was strategically able to come off as having advocated the public interest all along. Hence, in general, the culpits were able to maintain their credibility and position themselves to be the officials we turn to to fix the problem.

The influence of the bankers in the halls of government (and its central bank) is perhaps the cause of the Fed’s deficiencies in regulating Citigroup (and in the Clinton Administration’s position against regulating the sub-prime mortgage derivative securities). In the case of the New York Fed, the board that appoints the NY Fed President consists of Wall Street bankers. There is a structural conflict of interest in having the regulated appoint the regulator. This structural conflict of interest manifested itself materially in the case of Tim Geithner and Citigroup. This is a textbook example of a conflict of interest, and yet it went under the radar screen. The focus in regulatory deficiency is typically instead on whether the regulators are sufficiently staffed and trained, and perhaps on whether they are relying too much on information from the regulatees. The more basic structural conflicts of interest are rarely made transparent, yet we will continue to see regulatory “deficiencies” manifest from them unless structural or institutional reforms are made. I am continually amazed at how such glaring institutional conflicts of interest are ignored by the public and the media. I would expect the politicians and the business practioners to try to keep it hush hush, but the inability of the American people to grasp the problem confounds my attempt to explain it.

Sources: http://www.nytimes.com/2010/04/08/business/08panel.html?ref=us ; CSPAN.

Despite the weak U.S. economy, 2010 could be the second most profitable for New York City's securities industry, and the average bonus may top last year's because so many bankers and brokers have been laid off. Wall Street earned $21.4 billion during the first three quarters of 2010. The prior year's record of $61.4 billion was fueled by the bailout by the U.S. Government. Wall Street paid out $20.3 billion in bonuses on the $61.4 billion in profits. According to New York City Comptroller John Liu, "The astounding recovery of financial firm profitability in 2009 has been followed by a mixed year in 2010, yet total compensation in the industry is expected to be up modestly once year-end bonuses are paid," Meanwhile, Goldman Sachs’ Chief Executive Officer Lloyd C. Blankfein and his top deputies will collect about $111.3 million in stock in January, 2011, in a delayed payoff from 2009 and their record-setting 2007 bonuses, according to a Bloomberg News report. Within a year after the bonuses were approved, Goldman Sachs took $10 billion from the U.S. Treasury, converted to a bank and was borrowing as much as $35.4 billion a day from Federal Reserve emergency programs, Bloomberg reported, adding that in 2010 the firm paid $550 million to settle U.S. regulators’ fraud charges related to a mortgage-security the company sold in 2007.

Analysis:
Three points come to mind from this report from MSNBC.  First, the disjunction between Wall Street and Main Street means that any recovery underway in 2010 was not uniform through the U.S. economy. In other words, the "jobless" recovery did not hurt bonuses in the financial sector.  Secondly, the dictum that the fraudulant must inevitably pay is effectively countered by the example of Goldman Sachs.  Blankfein testified before Sen. Levin's Investigations committee that Goldman Sachs had merely been a market-maker even as the bank had traded on its own books to short against the mortgage derivatives even as it was selling them to its clients. In other words, the bank was profiting both ways even as it was contributing to the financial crisis.  After an infusion of government cash, the bank has made off quite well. Lest I be accused of envy, it is the unfairness involved that has inspired this post. Lastly, the positive impact of the bank bailout on the industry (and its bonuses) can be distinguished from the lack of help from the U.S. Government to the millions of homeowners who have lost their homes.  I say "homes" rather than houses to extentuate the point that foreclosure extolls rather severe costs in addition to the financial kind. I distinguish the luxuriating bankers from the plight of the foreclosed in order to point to Barak Obama's priority. His chief economic advisor until the end of 2010, Larry Summers (whose high school economics teacher is one of my mother's cousins), had been involved in obstructing efforts to regulate derivatives in 1998 (Summers was one of Rubin's deputies in Treasury under Clinton at the time).  Furthermore, Tim Geitner, Obama's Treasury Secretary, had been appointed as President of the New York Federal Reserve by a board with the urging of Citibank).  In other words, Obama's leanings toward Wall Street can be understood both from the directionality of the bailout and whom he has appointed. We should not really be surprised that the big banks and their employees whom the banks have not let go came back to vigor so quickly while the general recovery has been jobless.  Those who have, get more, while those who don't have, remain stuck.  The impact on the viability of our republics can not be good. Increasing inequality exascerbated by government policy cannot but render us even more a plutocracy (i.e., rule by the wealthy). To reply that any effort to tamper with this increasing inequality threatens property rights and economic liberty ignores the disparate impact of government policy (e.g., the bank bailout) on the wealthy. Moreover, when economic inequality threatens the viability of representative democracy, that democracy has a right to correct that which threatens it. One might call the policy-driven inequality a systemic risk that cannot be allowed to continue to exist without threatening the viability of the system. To put it plainly, a person does not have the right to riches if they risk the entire system coming down or even being compromised.  An absolute right to property, like an absolutist conception of sovereignty, is simply irresponsible and ultimately selfish. The 2010 bonuses coming out of Wall Street so soon after the crisis of 2008 and the subsequent bailout suggest that the extent of economic inequality in the U.S. is neither an accident nor natural.

FYI: If any of this post is significant enough to be logged in memory and reflected on later, it might be that the bank bonuses occurred during a jobless "recovery." This juxtaposition is in itself indicative of something troubling going on.

Source: http://www.msnbc.msn.com/id/40681578/ns/business-stocks_and_economy/%22%3Ehttp://www.msnbc.msn.com/id/40681578/ns/business-stocks_and_economy/%3C/a%3E%3C/p