Posts tagged with 'derivatives'
Weekly Audit: Financial Reform Makes Headway, Jobs And Social Security In Jeopardy
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by Zach Carter, Media Consortium blogger
Two critical Wall Street reforms, once declared dead by U.S. megabanks, are suddenly close to Congressional approval. As the House and Senate iron out the differences between their financial overhauls, it now appears that lawmakers are finally willing to ban banks from gambling with taxpayer money by implementing a strong Volcker Rule, and to end taxpayer subsidies for risky derivatives operations.
These reforms will help stabilize the U.S. economy by clamping down on the naked speculation the drove financial markets off a cliff in 2008. But while lawmakers are finally waking up to the economic and political necessity of strong Wall Street reforms, conservatives have blocked key efforts to ease unemployment. President Barack Obama also appears ready to surrender to an assault on Social Security later this year. (more…)
Weekly Audit: Wall Street Goes to the Movies
by Zach Carter, Media Consortium blogger
Last week, the U.S. Senate rejected a plan that would have broken up the nation’s six largest banks firms into firms that could fail without wreaking havoc on the economy. Even though the defeat reinforces Wall Street’s political dominance, there is still room for a handful of other useful reforms, like banning banks from gambling with taxpayer money and protecting consumers from banker abuses. After looting our houses, banks are now pushing for the ability to bet on movie box-office receipts, and will keep trying to financialize anything they can unless Congress acts.
Wall Street calls the shots
Writing for The Nation, John Nichols details last week’s Capitol Hill damage. Today’s financial oligarchy, in which a handful of bigwig bankers and their lobbyists are able to write regulations and evade rules they don’t like, will still be in place after the Wall Street reform bill is passed. The lesson is clear, as Nichols notes:
Whatever the final form of federal financial services reform legislation, one thing is now certain: The biggest of the big banks will still be calling the shots.
Still worth fighting for
As I emphasize for AlterNet, Congress has made a terrible mistake here, but there is still room for reform. It took President Franklin Delano Roosevelt seven years to enact his New Deal banking laws. It took even longer to reshape public opinion of monopolies when President Theodore Roosevelt took on Corporate America in the early 1900s.
What’s still worth fighting for? We have to curb the derivatives market—the multi-trillion-dollar casino that destroyed AIG. We have to impose a strong version of the Volcker Rule, which would ban banks from engaging in speculative trading for their own accounts. We have to change the way the Federal Reserve does business and force the government’s most secretive bailout engine to operate in the open. And we have to establish a strong, independent Consumer Financial Protection Agency to ensure that the horrific subprime mortgage abuses are not repeated.
As Nomi Prins details for The American Prospect, the current reform bill will not effectively deal with the dangers posed by hedge funds and private equity firms—companies that partnered with banks to blow up the economy through investments in subprime mortgages. That means that whatever happens with the current bill, Congress must again take action next year to rein in other financial sector excesses.
The derivatives casino at the movies
As Nick Baumann demonstrates for Mother Jones, banks are doing everything they can to gobble up other productive elements of the economy. The economy crashed in 2008 in large part because banks had used the derivatives market to place trillions of dollars in speculative bets on the housing market. This wasn’t lending, it was pure gambling: Instead of using poker chips, bankers placed their bets with derivatives. But, as Baumann emphasizes, banks are now looking to expand the sort of thing they can make derivatives gambles with. The latest proposal is to allow banks to bet on the box office success of movies. That’s right, banks would be gambling on movies.
Hollywood may be shallow, but it isn’t stupid. It doesn’t want to see the banking industry repeat its destructive looting of the housing industry on the movie business, and is pushing hard to ban banks from betting on movies. But we can’t count on every industry having a powerful lobby group to counter every assault from the banking system.
Taking stock in schools
Consider the unsettling report by Juan Gonzales of Democracy Now!. Gonzales details how big banks gamed the charter school system to score huge profits while simultaneously saddling taxpayers with massive debts that make teaching kids supremely difficult. By exploiting multiple federal tax credits, banks that invest in charter schools have been able to double their money in seven years—no small feat in the investing world—while schools have seen their rents skyrocket. One school in Albany, N.Y. saw its rent jump from $170,000 to $500,000 in a single year.
About that unemployment rate…
It’s not like public schools are flush with cash right now. The $330,000 increase in rent could pay the salaries of more than a few teachers. As the recession sparked by big bank excess grinds on, even the good news is pretty hard to swallow. As David Moberg emphasizes for Working In These Times, the economy added 290,000 jobs in April, but the unemployment rate actually climbed from 9.7 percent to 9.9 percent in March. That’s because the unemployment rate only counts workers who are actively seeking a job—if you want a job but haven’t found one for so long that you give up, you’re not technically “unemployed.” All of those “new” workers are driving the official figures up.
In other words, it’s still rough out there. And likely to stay rough as state governments try to deal with the lost tax revenue from plunging home values and mass layoffs. Nearly half of all unemployed people in the U.S. have been out of a job for six months or more. And while we’d be much worse off without Obama’s economic stimulus package, that percentage is likely to grow this year, Moberg notes.
This is what unrestrained banking behemoths do. They book big profits and bonuses for themselves, regardless of the consequences for the rest of the economy. Congress absolutely must impose serious financial reform this year. After the November election, breaking up the banks must once again be on the agenda when Congress considers the future fate of hedge funds, private equity firms, Fannie Mae and Freddie Mac. If we don’t rein in Wall Street, banks will continue to wreak havoc on our homes, our jobs and even our schools. Congress must act.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
Weekly Audit: Wall Street Reform, Financial Fraud, and Foreclosures
by Zach Carter, Media Consortium blogger
Last week, Senate Democrats broke the Republican filibuster on Wall Street reform. This week, Senators are introducing key amendments to strengthen the bill. While the current legislation is not strong enough to seriously curtail Wall Street abuses, all hope is not lost: A mere handful of amendments could make reform a reality. Unwinding the excesses of the Bush-era economy will require tough new rules on the nation’s largest banks. It will also require aggressive prosecution of fraud, and a serious new plan for helping homeowners in distress.
Ending too-big-to-fail
As Sen. Bernie Sanders (I-VT) emphasizes in an interview with GRITtv’s Laura Flanders , the four largest U.S. financial institutions have more than $7 trillion in assets—that’s over half the size of the entire U.S. economy. With that kind of political and economic muscle, banks can influence just about any financial reform that makes it through Congress simply by intimidating the regulators who try to implement them. (more…)
Weekly Audit: How Deregulation Fueled Goldman Sachs’ Scam
by Zach Carter, Media Consortium blogger
Last week, the Securities and Exchange Commission filed fraud charges against Goldman Sachs and underscored what most Americans have believed for some time: Wall Street has rigged the economy in its own favor, and will stop at nothing—not even outright theft—to boost its profits. What’s worse, Goldman’s scam could have been completely prevented by better regulations and law enforcement.
Goldman’s heist
Let’s be clear. “Financial fraud” means “theft.” Goldman Sachs sold investors securities that were stocked with subprime mortgages and had been cherry-picked by a hedge fund manager named John Paulson. Paulson believed these mortgages were about to go bust, so he helped Goldman Sachs concoct the securities so that he could bet against them himself.
Goldman Sachs, like Paulson, also bet against the securities. But when Goldman sold the securities to investors, it didn’t tell them that Paulson had devised the securities, or that he was betting on their failure. By withholding crucial information from investors, Goldman directly profited from the scam at the expense of its own clients. If ordinary citizens did what the SEC’s alleges Goldman did, we’d call it stealing. (more…)
Weekly Audit: Dismantling the Wall Street Casino
By Zach Carter, Media Consortium Blogger
Bailout pay czar Ken Feinberg raised a ruckus last week when he announced plans to slash cash payouts to executives at seven companies that have received massive levels of taxpayer support. While better oversight of the bailout barons is helpful, the best way to change Wall Street pay practices is to adopt a set of tough, comprehensive regulations that cover everything from the executive suite to the loan department. As is, many of the executives Feinberg cracked down on will still make millions this year from stocks and other perks, while the very banks that depend the most on bailout money are spending like mad to lobby against reform. (more…)
Weekly Audit: Obama’s Economic Hits and Misses
By Zach Carter, Media Consortium Blogger
Eight months after President Obama was sworn into office, the foreclosure epidemic is even more dire and no laws have been passed to rein in Wall Street. While Obama has helped cushion the nation’s economic fall with a stimulus plan and other proactive measures, much more aggressive action is needed to protect workers and homeowners from reckless financiers.
In an a piece for The Nation, John Nichols dissects Obama’s recent speech on the one-year anniversary of Lehman Brothers’ bankruptcy. Obama praised the Bush administration’s bank bailouts and advocated for regulatory reforms, because after eight months in office, we still haven’t seen any new financial regulations. Quoting a recent New York Times article on the status of the federal budget deficit, Nichols notes:
“It is not programs that care for the children of immigrants or aid to poor countries that emptied the Treasury, and it is not the ‘threat’ of healthcare reform that worries serious economists. The federal government has become ‘the guarantor against risk for investors large and small’ while doing little to restrain CEO greed or to protect the citizens, consumers and communities that have been battered by banksters.”
There are some signs of hope, however. Obama’s decision to appoint Daniel Tarullo, a former assistant to President Bill Clinton on international economic policy, to the Federal Reserve Board of Governors appears to be paying off—though its been sorely underreported in the mainstream press. Salon’s Andrew Leonard highlights a Wall Street Journal story indicating that Tarullo is close to securing major restrictions on bank pay practices. That’s extremely good news: blockbuster bonuses don’t just fuel inequality. Bankers “earn” those paydays by taking on huge levels of risk so their companies can book short-term profits. Banks were literally rewarding their top managers and executives for sabotaging the global economy.
Unfortunately, Obama has also appointed deregulatory crisis-causers to major regulatory positions. The most recent outrage, as David Corn and Daniel Schulman detail for Mother Jones, is Republican Scott O’Malia’s appointment as a Commissioner of the Commodity Futures Trading Commission (CFTC). The CFTC oversees a wide array of important trade activities, including much of the oil and energy market. O’Malia has a history of lobbying against regulation in these very markets. He spent years peddling political influence for an electricity company, Mirant, which has a history of stretching the law to profit at the public’s expense. In 2003, the year after O’Malia left the company, Mirant paid about $500 million to settle charges that it illegally ripped off California citizens during the state’s electricity crisis.
Presidents typically allow very few members on top regulatory panels to come from the opposite political party—the idea is to prevent independent regulatory agencies from becoming political hatchet teams. Unfortunately, Obama’s other appointments have been questionable as well.
Obama appointed Gary Gensler Chairman of the CFTC earlier this year, despite his record as a leading advocate against the regulation of complex financial products called derivatives in the 1990s. Gensler won the battle on blocking derivatives regulation, a move which helped drive the global economy into a massive recession in less than a decade. Much of the problem has to do with their complexity. Many people who traded these products did not understand just how risky they were. And as former Lehman Brothers investment banker Sony Kapoor explains in an interview with Paul Jay of The Real News, this confusing complexity was intentional. By making new financial derivatives hard to understand, major Wall Street brokerages like Lehman and Goldman Sachs were able to overcharge for them.
Some derivatives enabled other destructive economic activities. Credit default swaps provided insurance against losses from loans. If a bank was worried that a loan would not be paid back, they could go to AIG and buy insurance. The bank would pay a modest monthly fee to AIG, and if the loan ever went bust, AIG would pay the bank the full value of the loan. The swaps actually encouraged reckless subprime lending. And while plenty of Wall Streeters failed to recognize the risk associated with derivatives, almost everybody knew that subprime lending was a disaster in the making. But since Wall Streeters didn’t want to give up huge short-term profits associated with subprime lending, credit default swaps allowed them to have their cake and eat it too. Banks could book the outsized profits from subprime lending, but insure themselves against the inevitable losses by going to AIG for insurance. In effect, these crazy derivatives were actually fueling the subprime lending boom.
And the foreclosures spawned by exotic mortgages are nowhere near their peak. Laura Flanders of GRITtv interviews Rosemary Williams and Ann Patterson, two Minneapolis homeowners with adjustable-rate mortgages (ARMs) trying to fight off foreclosure. During the housing boom, banks pushed millions of borrowers into ARMs—loans that start with a low interest that resets higher after a few years—without worrying about whether they could afford the higher payments. Those loans are only beginning to reset now, with the vast majority scheduled to pinch pocketbooks over the next two years.
The government’s support for citizens laid off as a result of the recession has not been generous. Obama fought hard to pass his economic stimulus package immediately after entering office, helping create some jobs and providing a very modest expansion of unemployment benefits to laid-off workers (I do mean modest—it’s an extra $25 per week). But while the stimulus package helped slow the economic plunge, the private sector is not likely to start hiring new workers for years, as Roger Bybee notes for In These Times. The social cost of unemployment, Bybee emphasizes, is absolutely enormous. For every 1% increase in the unemployment rate that is sustained over six years, 47,000 people actually die, while prisons and mental hospitals are flooded with inmates and patients.
Congress would be happy to sweep financial regulation under the rug and pretend the problem has passed. Obama is capable of making good decisions on the economy, but he’ll have to go to the mat for reform if we want any hope of fully recovering from the Bush era.
This post features links to the best independent, progressive reporting about the economy and is free to reprint. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.
Weekly Audit: Obama’s Regulation Overhaul Comes Up Short
by Zach Carter, TMC MediaWire Blogger
President Barack Obama rolled out his plan to overhaul financial regulation last week. While much of the Obama plan relies on the same regulators and structures that led to the current meltdown, there is one key exception. The establishment of an independent Consumer Financial Protection Agency would give ordinary citizens a seat at the financial policy table for the first time and prevent the abuses in credit card and mortgage lending that have wreaked havoc on households all over the country.
The new agency is the brainchild of Harvard University Law School Professor Elizabeth Warren. As chair of a key oversight panel for the Treasury Department’s bank bailout program, Warren has uncovered major deficiencies in the government’s handling of the plan, including nearly $80 billion in overpayments to bailed-out banks. American News Project features footage of an interview with Warren, who explains why we need a separate agency to regulate on behalf of consumers.
Several bank regulatory agencies, the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision are already charged with writing and enforcing consumer protection rules for credit cards and mortgages, but have generally abandoned these duties to act as cheerleaders for their banks.The current structure’s problems are two-fold. First, the current regulators are funded by fees levied on the very banks they regulate. When there are several different bank regulators, regulators compete to offer the weakest oversight and attract more banks, and, in turn, more funding. The process quickly becomes a race to the bottom. When the subprime mortgage boom was surging in 2003, the OCC, a federal bank regulator, went to court to ensure that the state of Georgia’s tough predatory lending laws could not be enforced.
Second, the regulatory agencies tend to look at the health of the bank, rather than the quality of the loans it makes. If a commercial bank like Citigroup makes a really outrageous predatory loan, then sells that loan to an unregulated investment bank like Goldman Sachs, Citi’s regulator doesn’t particularly care. A new regulatory agency that answers exclusively to consumers rather than banks would be a very meaningful change for the financial system.
The rest of the overhaul is a little frightening. As William Greider explains for The Nation, instead of crafting explicit rules to curb obvious abuses, Obama’s plan relies very heavily on ceding power to the Federal Reserve. Under the new framework, the Fed would both oversee “systemic risk” in the financial architecture and regulate the banks that have become “too big to fail.” This, Greider emphasizes, is a very bad idea. The Fed has repeatedly proven itself to be uninterested in regulating banks. Citi needed $45 billion in direct cash infusions from the U.S. taxpayer and hundreds of billions of dollars in other guarantees to stay afloat, as Nomi Prins writes for Mother Jones. Who was charged with regulating the company and making sure such an outrage never occurred? The Fed.
In a video spot for GritTV, former senior banking regulator William Black argues that it makes little sense to allow banks to become too big to fail at all. Sturdier regulations are better than nothing, but the real solution is to break them up. “Why would we allow banks to be so big that they threaten the global economy?” Black asks.
Going back to Prins in Mother Jones: Elsewhere, the regulatory revamp is simply too vague to be helpful. Regarding derivatives—the financial weapons of mass destruction that destroyed AIG—it’s not clear if Obama wants to regulate the entire industry, or a small, meaningless fraction. Obama’s plan is to require that “standardized” derivatives are traded on exchanges and allow “customized” derivatives to escape investor scrutiny. But the Treasury never explains what the difference is between these “standard” and “custom” products, or how it will make sure banks don’t game the system.
Lest we forget, this crazy finance system brought us the worst economic calamity since the Great Depression. The unemployment rate, by conservative measures, is at 9.4% and rising. You may have noticed the stories about “green shoots” signaling the first inklings of economic recovery circulating through the media. But these signs are only promising, AlterNet’s Joshua Holland explains, if you take them completely out of context and ignore all of the other terrible news. The economy is in great shape … except for the millions of foreclosures that will take place this year, the skyrocketing unemployment rate, the decimated retirement funds, and the mountains of credit card debt weighing down the average U.S. consumer.
Serious consumer protections are nothing to scoff at, especially after watching an outbreak of predatory mortgage lending spawn an economic collapse. It comes as no surprise then, as Tim Fernholz notes for The American Prospect, that the bank lobby is already working to water down the new consumer protection agency’s powers. But even if a regulator for consumers makes the final legislative cut, with so many drastic problems in the current financial regulatory structure, the Obama plan simply does not do what is necessary to fend off another crisis.
This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.
