http://www.commondreams.org/headline/2008/09/19
(Eric Thayer/Reuters)Thursday's immediate worry was the health of the two remaining large-scale private investment firms Goldman-Sachs and Morgan Stanley, as well as Seattle-based Washington Mutual. Would they make it through the day?
By mid-day Morgan Stanley was reported to be looking for a buyout by a regional bank, Wachovia.
The middle-of-the-night crisis call that all presidential hopefuls must claim to be ready for are now being directed to the Federal Reserve chairman or Treasury Secretary.
After all-night meetings and phone consultations, the Federal Reserve moved in the wee hours of Thursday to stabilise financial markets here and abroad with infusions of 55 billion dollars in the U.S. and 180 billion dollars to central banks around the world.
Will this, along with the federal takeover of the American Insurance Group and mortgage giants Freddie Mac and Fannie Mae -- be enough to halt the crisis? Pundits are doubtful, tending instead to insist that stricter regulation of financial markets is the vital component needed for a long-term cure.
Major media outlets, including Time, Inc. and the Washington Post, both today blamed lack of regulation for the crisis.
Business writers for Time.com wrote: 'Fear is so pervasive today because for years the financial markets -- and many borrowers -- showed no fear at all. Wall Streeters didn't have to worry about regulation, which was in disrepute,' leading to a 'hothouse of greed' and thus to the troubles we are seeing today, argued Andy Serwer and Allan Sloan.
The Washington Post ran a lengthy article blaming 'official Washington' for failing to oversee the machinations of Fannie Mae and Freddy Mac -- whose imminent failure sparked last weekend's crisis -- resulting in a federal takeover that will cost taxpayers billions of dollars.
The Centre for American Progress, a Washington-based think tank, also placed much of the blame on lack of regulation, charging in a statement today that President's George W. Bush's 'hands-off approach is what has propelled the current crisis.'
'Despite being in charge for seven and a half years, Bush administration regulators neither recognise how the current turmoil could have been avoided with more effective supervision of the financial markets nor understand how the resolution of this crisis begins with individual homeowners,' argues Andrew Jakabovics on the Centre's website.
James K. Galbraith, a professor of business at the University of Texas at Austin, and author of a recent book on free-market economics, argued that: 'Deregulation has been the public faith of the financial sector since [Ronald] Reagan. Under Bush II, waves of predatory finance in housing were aggressively promoted by Alan Greenspan, by McCain's closest economic adviser Phil Gramm, and by so-called regulators who systematically subverted the public interest.'
Deregulation was the theme song of the Ronald Reagan presidency, epitomised by his assertion that 'Government is not the solution. Government is the problem.'
Reagan oversaw the elimination of government controls over a wide range of financial institutions and instruments, consistent with his belief, shared by most Republicans, that financial markets should be unfettered.
More recently -- and very pertinent to the current crisis -- passage of the Financial Services Modernisation Act of 1999, proposed by Republicans Phil Gramm and Jim Leach, did away with financial controls imposed under the New Deal that had barred banks, brokerage firms and insurance companies from mergers and involvement across sectors.
The banking industry and its powerful lobbyists had been pressing Congress to change the law for some time. But Congress' research arm, the Congressional Research Service, advised against overturning the 1933 legislation, known as the Glass-Steagall Act. Nevertheless, Glass Steagall was overturned, and less than 10 years later the consequences are being felt throughout the country.
Most analysts are hesitant to predict the future, except to foresee that the U.S. economy and population will continue to experience financial turbulence and pain for some time to come.
Nomi Prins, with a decade of experience working at Bear Sterns, Lehman Brothers, and Goldman Sachs is now pressing for urgent reform. 'Only a quick bout of sweeping and decisive regulation can fix what's broken,' she said.
She points out that until the complexity of entities created since 1999 means that no one is capable of regulating or overseeing them. The Federal Reserve, for example, is not set up to regulate the insurance business.
'If you buy a new car, you want to look under the hood to make sure it runs,' Prins told IPS. 'The same should be true of decisions made in recent weeks to either bail out or facilitate the merger of failing institutions, but this is not happening, there is no conversation; no strategy.'
Focusing on the trigger of today's crisis, sub-prime mortgages, the Centre for American Progress' Jakabovics argued that the solution lies in developing a programme to help strapped homeowners repay their debt, not standing by and watching them default.
Business analysts Serwer and Sloan warn that: 'Whatever the politicians do, we as a society are going to be poorer than we were,' because credit will be harder to come by, and U.S. citizens will have to learn to live within their means.
'For a year, the Fed and Treasury have been propping up the markets in the hope that this system would recover on its own. It will not, and today's [Lehman] collapse should mark the end of that mindset,' they said.
[snip]
Re-enact the Glass-Steagall Act, or at least restore its provisions.
The Long Demise of Glass-Steagall
http://www.pbs.org/wgbh/pages/frontline/sh...ill/demise.html
Interesting how the financial services industry, in finally disposing of what they call a "Depression era relic," seem to have started a new Great Depression.
Full Version: Only Real Fix is Regulatory, Analysts Say
if memory serves, bush deregulated everything within his first 100 days with the backing of the repub house and senate, and now we're feeling the effects.
I like the car analogy, as it's true ... your sleazy used car salesman somehow sold you a car for trillions of dollars and now it's a steaming heap of broken down junk sitting on the side of the road ... along comes the same sleazy used car sales man and tells you that you need to give him another trillion or two for him to try to "fix" your car, no guarantees he will be able to fix it, and while he's "fixing" it if he wants to take the set of new tires, sell them and replace them with old worn out used tires and keep the progit, he can do that and you can't say anything about it ... Oh, and if he can't fix it you are out ALL the money you put into it, and IF he is able to fix it and put it back in working order, it goes back to his car lot so he can sell it back to you again.
SCAM SCAM SCAM.
SCAM SCAM SCAM.
I posted this in another thread, and it shows me that the FED and the SEC highly compounded the problems set forth by the deregs started by Gramm and others. This started in earnest in 2004, with another SEC blunder in 2006, as evidenced in the following article. I prefaced the article, which was written in June, 2007, with the stunning and prescient comment by someone that followed it:
source
Thanks for posting this. This is really hard to believe. Though credit and leverage have been extended to record (and dangerous) levels, the SEC wants to enable firms to increase leverage and credit even further. Makes you wonder if the SEC is actively trying to destroy the economy. Or maybe they're just trying to make sure rich investors have made a maximum killing before the economy collapses.
The move by the SEC appears more than ill-advised. It appears avaricious, and borderline criminal. The least egregious interpretation is that they're trying to keep over-leveraged firms from collapsing in the near future (while making such collapse more likely in the future).
This is truly a "faith-based" economy, heading for a "fate-based" collapse.
Tuesday, June 12, 2007
Do Regulators Talk to Each Other? (Prime Broker Edition)
What the Fed and the Treasury would like take away, the SEC gives, and then some.
The Fed is (finally) getting worried about systemic risk, and in this Financial Times story, the Treasury Department (which usually stays clear of this sort of thing, generally deferring to the Fed) says that it is concerned about hedge funds and the exposures that financial institutions have to them.. Annoyingly, the FT website is failing to load the story (this happens way too often) but the first few lines provide the gist:
Hedge funds and those doing business with them were on Monday warned by the US Treasury not to operate “under the false allusion” that systemic risk from their activities was not a “real possibility” in spite of the increased sophistication of risk management.
The comments are the strongest sign yet of US policymakers’ concern that markets should not take undue comfort from the relative lack of fall-out from last year’s multi-billion dollar losses at hedge fund Amaranth.
So here we have the two biggest heavyweights (at least in terms of prestige) in regulating financial institutions (remember the Office of the Comptroller of the
Currency is a bureau of the Treasury). Remember too that it is the Fed that has take the lead in monitoring risk management practices, including the management of derivatives positions, at financial institutions, including investment banks, even though its regulatory authority over investment banks is limited.
So at a time when the Fed and the Treasury perceive increasing risk, particularly relating to hedge funds, what does the SEC do? It cuts the capital requirements for the biggest investment banks.
It is difficult to stress how dumb in general, and how ill timed in particular, this move is. The firms that get the break are Goldman, Morgan Stanley, Bear Stearns, Merrill, and Lehman. The first three on that list have an estimated 70% of the prime brokerage business, and the money-maker in that is lending to hedge funds. So at a time when firms are being warned about needing to be cautious about their exposure to hedge funds, they are suddenly given the opportunity to greatly increase the size of their balance sheets. The most likely takers are those very same hedge funds.
The other reason this is a horrible measure is that we are entering a period when bond yields are rising. In addition, we may be at the end of a long cycle, and thus normal historical relationships between markets and instruments may break down. Despite all the fancy hedging techniques available, bond dealers find it hard not to be net long. The best defense at a time like this is to shrink one's balance sheet as a defense against losses (as interest rates rise, the value of any net long bond position will fall).But again, if one believes one can navigate these newly treacherous waters, it is tempting to balloon the balance sheet instead (in adverse markets, profits are harder to come by, and a bigger balance sheet means more volume).
So why might the SEC be doing this? It regulates the securities industry, and regulators often get coopted by their charges. The investment banking industry has probably been pushing for this measure for years, and the SEC relents at the worst possible time, at the end of the cycle. The only good news in this picture is that the need for the investment banks to preserve their credit ratings will likely limit how much more gearing they take on.
From Bloomberg:
Never mind that Wall Street's profit growth in the second quarter probably was the worst in two years. A new regulation relieving capital restraints may enable the biggest U.S. securities firms to make the rest of 2007 exceptional for shareholders.
Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. have the potential to earn $4.4 billion more annually as early as next year by moving money out of safe investments into higher- returning bets, said Dorothy Leas, a former treasurer at Paine Webber Group Inc. and Cowen Group Inc. The earnings gain, which would equal 14 percent of the New York-based firms' record profits of 2006, follows a rule change that allows them to hold less money in reserve for potential losses.
Investors are underestimating the benefits of ``alternative net capital requirements,'' a regulation passed by the Securities and Exchange Commission in 2004 to keep Wall Street firms competitive with their counterparts in the European Union, said Brad Hintz, an analyst at New York-based Sanford C. Bernstein & Co. Profits will get a boost in the second half of 2007, depending on how fast the five firms shift their capital, he said. U.S. commercial banks are receiving a similar break from the Basel II agreement, set to take effect as early as next year.
``They're all increasing capital at risk because the new capital requirements allow it,'' said Hintz, a former chief financial officer at Lehman. ``As the transition to the new capital rules is completed, they'll have more room to do so, and that will help their profit.''
Old Regime
Goldman, Morgan Stanley, Merrill, Lehman and Bear Stearns, the only firms cleared by the SEC to adopt the new capital- adequacy standards, declined to make executives available for comment.
Under the old regime, securities firms had to reserve a set percentage of every dollar of capital at risk to ensure solvency in the event of a market collapse or failure of a major client. At the end of every week, each firm would calculate the difference between what it owes and what it's owed and have to keep cash on hand to cover any net liabilities.
The new rule takes a more nuanced approach. Reserves are determined according to a combination of risks including losses from credit deterioration, adverse market movements, inadequate internal controls and changes in legislation. They permit securities firms to use non-cash assets, such as derivative contracts, to offset risk.
~snip
source
Thanks for posting this. This is really hard to believe. Though credit and leverage have been extended to record (and dangerous) levels, the SEC wants to enable firms to increase leverage and credit even further. Makes you wonder if the SEC is actively trying to destroy the economy. Or maybe they're just trying to make sure rich investors have made a maximum killing before the economy collapses.
The move by the SEC appears more than ill-advised. It appears avaricious, and borderline criminal. The least egregious interpretation is that they're trying to keep over-leveraged firms from collapsing in the near future (while making such collapse more likely in the future).
This is truly a "faith-based" economy, heading for a "fate-based" collapse.
Tuesday, June 12, 2007
Do Regulators Talk to Each Other? (Prime Broker Edition)
What the Fed and the Treasury would like take away, the SEC gives, and then some.
The Fed is (finally) getting worried about systemic risk, and in this Financial Times story, the Treasury Department (which usually stays clear of this sort of thing, generally deferring to the Fed) says that it is concerned about hedge funds and the exposures that financial institutions have to them.. Annoyingly, the FT website is failing to load the story (this happens way too often) but the first few lines provide the gist:
Hedge funds and those doing business with them were on Monday warned by the US Treasury not to operate “under the false allusion” that systemic risk from their activities was not a “real possibility” in spite of the increased sophistication of risk management.
The comments are the strongest sign yet of US policymakers’ concern that markets should not take undue comfort from the relative lack of fall-out from last year’s multi-billion dollar losses at hedge fund Amaranth.
So here we have the two biggest heavyweights (at least in terms of prestige) in regulating financial institutions (remember the Office of the Comptroller of the
Currency is a bureau of the Treasury). Remember too that it is the Fed that has take the lead in monitoring risk management practices, including the management of derivatives positions, at financial institutions, including investment banks, even though its regulatory authority over investment banks is limited.
So at a time when the Fed and the Treasury perceive increasing risk, particularly relating to hedge funds, what does the SEC do? It cuts the capital requirements for the biggest investment banks.
It is difficult to stress how dumb in general, and how ill timed in particular, this move is. The firms that get the break are Goldman, Morgan Stanley, Bear Stearns, Merrill, and Lehman. The first three on that list have an estimated 70% of the prime brokerage business, and the money-maker in that is lending to hedge funds. So at a time when firms are being warned about needing to be cautious about their exposure to hedge funds, they are suddenly given the opportunity to greatly increase the size of their balance sheets. The most likely takers are those very same hedge funds.
The other reason this is a horrible measure is that we are entering a period when bond yields are rising. In addition, we may be at the end of a long cycle, and thus normal historical relationships between markets and instruments may break down. Despite all the fancy hedging techniques available, bond dealers find it hard not to be net long. The best defense at a time like this is to shrink one's balance sheet as a defense against losses (as interest rates rise, the value of any net long bond position will fall).But again, if one believes one can navigate these newly treacherous waters, it is tempting to balloon the balance sheet instead (in adverse markets, profits are harder to come by, and a bigger balance sheet means more volume).
So why might the SEC be doing this? It regulates the securities industry, and regulators often get coopted by their charges. The investment banking industry has probably been pushing for this measure for years, and the SEC relents at the worst possible time, at the end of the cycle. The only good news in this picture is that the need for the investment banks to preserve their credit ratings will likely limit how much more gearing they take on.
From Bloomberg:
Never mind that Wall Street's profit growth in the second quarter probably was the worst in two years. A new regulation relieving capital restraints may enable the biggest U.S. securities firms to make the rest of 2007 exceptional for shareholders.
Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. have the potential to earn $4.4 billion more annually as early as next year by moving money out of safe investments into higher- returning bets, said Dorothy Leas, a former treasurer at Paine Webber Group Inc. and Cowen Group Inc. The earnings gain, which would equal 14 percent of the New York-based firms' record profits of 2006, follows a rule change that allows them to hold less money in reserve for potential losses.
Investors are underestimating the benefits of ``alternative net capital requirements,'' a regulation passed by the Securities and Exchange Commission in 2004 to keep Wall Street firms competitive with their counterparts in the European Union, said Brad Hintz, an analyst at New York-based Sanford C. Bernstein & Co. Profits will get a boost in the second half of 2007, depending on how fast the five firms shift their capital, he said. U.S. commercial banks are receiving a similar break from the Basel II agreement, set to take effect as early as next year.
``They're all increasing capital at risk because the new capital requirements allow it,'' said Hintz, a former chief financial officer at Lehman. ``As the transition to the new capital rules is completed, they'll have more room to do so, and that will help their profit.''
Old Regime
Goldman, Morgan Stanley, Merrill, Lehman and Bear Stearns, the only firms cleared by the SEC to adopt the new capital- adequacy standards, declined to make executives available for comment.
Under the old regime, securities firms had to reserve a set percentage of every dollar of capital at risk to ensure solvency in the event of a market collapse or failure of a major client. At the end of every week, each firm would calculate the difference between what it owes and what it's owed and have to keep cash on hand to cover any net liabilities.
The new rule takes a more nuanced approach. Reserves are determined according to a combination of risks including losses from credit deterioration, adverse market movements, inadequate internal controls and changes in legislation. They permit securities firms to use non-cash assets, such as derivative contracts, to offset risk.
~snip
QUOTE (rememberearth @ Sep 21 2008, 11:03 AM) 
if memory serves, bush deregulated everything within his first 100 days with the backing of the repub house and senate, and now we're feeling the effects.
I don't normally like to overdo the Blame Clinton meme, but ... the Gramm gang destroyed Glass-Steagall in 1999, and we have to blame Big Bill for going along.
'course.... Chelsea does work for a hedge fund ... but we digress. And yah, absolutely, the Bush gang & Greenspan simply completed the implosion started in 1999.
Bottom line is this: deregulation has fucked us several ways from Sunday. Deregulation destroyed and bankrupted the cable industry, the airline industry, the telecom industry, the S & Ls, and now the financial services industry. In many ways, this really is a repeat of the S & L situation all over again, complete with them planning a new incarnation of the Resolution Trust Corporation (RTC) to save the day - at taxpayer expense, natch. We deregulated these guys, let them play their stupid Ponzi schemes with no regulation or oversight, and now have to clean up their mess.
And so what's the answer of McCain and the Republicans to our problems? More deregulation! This time now they're going to deregulate health care.
They are in a hole, and fucking digging at 100 miles an hour.
The so-called fix is two things: Shock Doctrine as Naomi Klein tried, bless her heart, to articulate between the verbal farting of Andrew Sullivan on Bill Maher last week.
The second reeks of simply transferring more of the nation's treasury to overseas companies with no oversight and to ensure the golden parachutes and lavish benefits plans of CEOs (the American ruling/oligarchy).
What does the average tax payer get out of all this? More banana republic "capitalism" -- raping and louting the public to protect the oligarchy. Even the nut cases at World Net Daily, if you hold your nose and go over there, are having a hard time NOT pinning this on Bush.
The second reeks of simply transferring more of the nation's treasury to overseas companies with no oversight and to ensure the golden parachutes and lavish benefits plans of CEOs (the American ruling/oligarchy).
What does the average tax payer get out of all this? More banana republic "capitalism" -- raping and louting the public to protect the oligarchy. Even the nut cases at World Net Daily, if you hold your nose and go over there, are having a hard time NOT pinning this on Bush.
IMMEDIATELY stop the derivatives market! Emergency legislation!
Legacy of the Clinton Bubble: The Crisis in the Washington Consensus and the Return to Marginalist Analysis
Timothy A. Canova
Chapman University - School of Law
Dissent, Summer 2008
LINK
Legacy of the Clinton Bubble: The Crisis in the Washington Consensus and the Return to Marginalist Analysis
Timothy A. Canova
Chapman University - School of Law
Dissent, Summer 2008
LINK
DERIVATIVES
Senator Phil Graham created the derivatives laws while Clinton was being impeached..BUT Clinton signed it into law during his last term.
Senator Phil Graham created the derivatives laws while Clinton was being impeached..BUT Clinton signed it into law during his last term.
QUOTE (Seeker1 @ Sep 21 2008, 10:42 PM)
I don't normally like to overdo the Blame Clinton meme, but ... the Gramm gang destroyed Glass-Steagall in 1999, and we have to blame Big Bill for going along.
Not to defend Bill, because he is the "best Republican president" of the20th century, but that bill was sent to him as a veto proof bill.
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