Ratified by conventions in each U.S. state in the name of "The People".
Constitution has been AMENDED twenty-seven times;
December 15, 1791 FIRST TEN AMENDMENTS are known as Bill of Rights, ratified by 3/4ths of States
Introduced by James Madison to the First United States Congress in 1789 as a SERIES of ARTICLES..
Subsequent:
#11 (1795) Clarifies judicial power over foreign nationals, limits citizens to sue states in federal court-federal law.
#12 (1804) Changes method of presidential elections; members Electoral College separate ballots Pres/V-Pres
#13 (1865) Thirteenth Amendment to the United States Constitution ended legalized slavery.
#14 (1868) Defines a set of guarantees for United States citizenship;
#15 (1870) Prohibits FedGov/states using citizen's race, color, or previous slave status as qualification for voting.
#16 (1913) Authorizes unapportioned federal taxes on income.
#17 (1913) Establishes direct election of senators
#18 (1919) Prohibited the manufacturing, importing, and exporting of alcohol
#19 (1920) Prohibits federal/state government from forbidding any citizen to vote due to their sex.
#20 (1933) Changes details of congressional, presidential terms, and of presidential succession.
#21 (1933) Repeals Eighteenth Amendment. Permits states to prohibit importation of alcoholic beverages.
#22 (1951) Limits president to two terms
#23 (1961) Grants presidential electors to the District of Columbia
#24 (1964) Prohibits Fed/state governments from requiring Tax payment as voting qualification for FedOfficials
#25 (1967) Changes details of Pres. succession, provides temp removal of Pres, and for V.P.replacement
#26 (1971) Prohibits Fed/state govs from forbidding citizen age 18+ to vote account of age.
#27 (1992) Twenty-seventh Amendment (Amendment XXVII)
In A Nutshell - Gramm-Leach-Bliley Act, Commodity Futures Modernization Act
Matt Taibbi
“While we regret that we participated in the market euphoria and failed to raise a responsible voice, we are proud of the way our firm managed the risk it assumed on behalf of our client before and during the financial crisis,” he said. via Goldman Regrets ‘Market Euphoria’ That Led to Crisis - DealBook Blog - NYTimes.com.
“While we regret that we participated in the market euphoria and failed to raise a responsible voice, we are proud of the way our firm managed the risk it assumed on behalf of our client before and during the financial crisis,” he said.
via Goldman Regrets ‘Market Euphoria’ That Led to Crisis - DealBook Blog - NYTimes.com.
Anyone else out there find himself doubled over laughing after reading Goldman, Sachs chief Lloyd Blankfein’s “apology” for his bank’s behavior leading up to the financial crisis?
Has an act of contrition ever in history been more worthless and insincere? Even Gary Ridgway did a better job of sounding genuinely sorry at his sentencing hearing — and he was a guy who had sex with dead prostitutes because it was cheaper than paying live ones.
Looking at Blankfein’s one-sentence apology, I’m struck in particular by a couple of phrases:
While we regret that we participated in the market euphoria…
Really, Lloyd? You “participated” in the market euphoria? You didn’t, I don’t know, cause the market euphoria? By almost any measurement, Goldman was a central, leading player in the subprime housing bubble story. Just yesterday I was talking to Guy Cecala at Inside Mortgage Finance, the trade publication that tracks statistics in the mortgage lending industry. He said that at the height of the boom, in 2006, Goldman Sachs underwrote $76.5 billion in mortgage-backed securities, or 7% of the entire market. Of that $76.5 billion, $29.3 billion was subprime, which is bad enough — but another $29.8 billion was what’s called “Alt-A” paper. Alt-A mortgages are characterized, mainly, by crappy documentation and lack of equity: no income verification, no asset verification, little-to-no cash down. So while “only” 38% of the mortgage-backed securities Goldman underwrote were subprime, more than three-fourths of their securities were what is called “non-prime,” ie either subprime or Alt-A. “There’s a lot of crap in there too,” says Cecala.
Let’s be clear about what that meant. These crap/sham mortgages, a lot of them adjustable-rate deals with teaser rates that featured sudden rate hikes two or three years after closing, they would never have been possible had not someone devised a method for selling them off to secondary buyers. No local bank is going to keep millions of dollars worth of Alt-A mortgages on its books, because no sensible company lends out money to very risky customers and actually keeps those loans on its balance sheet.
So this system depended almost entirely on banks like Goldman finding ways to securitize these instruments, ie chop the mortgages up into little bits, repackage them as mortgage-backed securities like CDOs and CMOs, and sell them to unsuspecting customers on the secondary market, most of them large institutional buyers like pensions and insurance companies and workers’ unions, many of them foreigners. Most of those customers were snookered into buying this stuff because they had no idea what it was: in the case of pensions and unions particularly, a lot of these customers only bought this crap because the peculiar alchemy banks like Goldman used in devising their mortgage-backed securities made radioactive mortgages look like AAA-rated investments. (Or at least they were given these ratings by Moody’s and Standard and Poor’s, ratings agencies that were financially dependent upon the very banks they were supposed to be rating — but that’s another story).
So some Dutch teachers’ union that a year before was buying ultra-safe U.S. Treasury bonds in 2006 runs into a Goldman salesman who offers them a different, “just as safe” AAA-rated investment that, at the moment anyway, just happens to be earning a much higher return than treasuries. Next thing you know, a bunch of teachers in Holland are betting their retirement nest eggs on a bunch of meth addicted “homeowners” in Texas and Arizona.
This isn’t really commerce, but much more like organized crime: it was a gigantic fraud perpetrated on the economy that wouldn’t have been possible without accomplices in the ratings agencies and regulators willing to turn a blind eye. Imagine a meat company that bred ten billion rats, fattened them on trash and sewage, ground their bodies into chuck, and then sold it all as grade-A ground beef to McDonald’s and Burger King, right under the noses of the USDA: this is exactly the same thing, only with debt instead of food. We’re eating it, they’re counting the money.
Any way you slice it, Goldman was responsible for putting tens of billions of toxic mortgages on the market, resulting in mass foreclosures, mass depletion of retirement funds, and a monstrously over-leveraged financial system that we will now all be bailing out for the next half-century or so. All of this so that Goldman could make a few billion bucks acting as the middleman in all of these deadly transactions.
Anyway, I was also struck by this phrase:
…we are proud of the way our firm managed the risk for our clients…
First of all, generally speaking, when one apologizes for having done a bad thing (like for instance destroying the world economy), it is good form to wait at least until the end of the sentence to start bragging again.
Second of all, what is particularly obnoxious about this phrase is that Goldman is bragging about the fact that it actually made money while it was pumping the economy full of explosive leverage.
While companies like Lehman and Bear were dumb enough to actually eat their own rat meat, Goldman knew what it was doing and was careful to bet against the same stuff it was selling, which makes its behavior many times worse than that of other banks, not better.
I get into this more in a Rolling Stone piece coming out next week, but Goldman’s continual bragging about its mortgage hedges is one of the more obnoxious phenomena in the recent history of Wall Street, given that it was selling this sh*t by the ton during that same period.
Beyond that, Goldman’s “risk management” also involved buying massive hedges on its mortgage exposure from…drum roll please… AIG.
In fact Goldman was AIGFP’s single largest customer; while the bank was busy flooding the world financial system with doomed mortgages, it was also busy piling bets on the back of the insurance behemoth — $20 billion worth, to be exact.
And AIG’s death spiral was triggered not so much by its bets going sour, but by companies like Goldman that demanded that AIG put up cash to show its ability to pay.
These collateral calls were what killed AIG last September, and Goldman was one of those creditors pulling the trigger: what makes this fact even more obnoxious is that ex-Goldmanite Henry Paulson then stepped in and green-lighted an $80 billion taxpayer bailout. Ultimately another ex-Goldmanite named Ed Liddy was put in charge of AIG, and Goldman ended up getting paid 100 cents on the dollar for its AIG debt.
So basically Goldman helped kill AIG, necessitating a federal bailout, after which time it got paid off handsomely for bets that it certainly would not have been paid off completely for had AIG simply been liquidated.
And again, AIG probably does not have a market to sell its CDS insurance to firms like Goldman, if firms like Goldman had not cooked up this insane scheme to underwrite billions upon billions of toxic debt and sell it off to secondary buyers as safe investments.
Moreover AIG would not have even had this business of selling CDS insurance had not a bunch of ex-Goldman guys, in particular Bob Rubin, quietly pushed to deregulate the derivatives market back at the end of the Clinton administration.
So when Goldman says it is proud that it “managed the risk” for its clients, what it’s really saying is, “We’re proud that we kept the extreme crapiness of our mortgage securities secret from everyone but our clients, and fobbed off the nightmare leverage they created on dumbass AIG and all the pensioners and teachers and other idiots who bought this stuff."
There’s a much larger story about all of this coming out in the magazine next week, but in the meantime… hey, Lloyd, thanks for the apology. It makes us all feel a lot better.
http://trueslant.com/matttaibbi/2009/06/18/the-greatest-non-apology-of-all-time/
MATT TAIBBI Posted Mar 19, 2009 rollingstone.com [From Issue 1075 — April 2, 2009] http://www.rollingstone.com/politics/story/26793903/the_big_takeover
It's over — we're officially, royally screwed.
No empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when buffoons who have been running things in this country finally went one step too far.
It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring concrete and steel of American industry in country's heyday, only to destroy itself chasing phantom fortunes at Wall Street card tables, like a dissolute nobleman gambling away family estate in waning days of British Empire.
Latest bailout came as AIG admitted to having just posted largest quarterly loss in American corporate history — some $61.7 billion.
In final three months of last year, company lost more than $27 million every hour.
That's $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second.
All this happened at end of eight straight years that America devoted to frantically chasing shadow of a terrorist threat to no avail; eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste.
Yet in end, our government had no mechanism for searching balance sheets of companies that held life-or-death power over our society and was unable to spot holes in national economy size of Libya (whose entire GDP last year was smaller than AIG's 2008 losses).
So it's time to admit it:
We're fools, protagonists in a kind of gruesome comedy about “marriage of greed and stupidity”.
Worst part about it is that we're still in denial — we still think this is some kind of unfortunate accident, not something that was created by group of psychopaths on Wall Street whom we allowed to gang-rape American Dream. When Geithner announced new $30 billion bailout, party line was that POOR AIG WAS JUST a VICTIM of a lot of bad luck — bad year for business, you know, what with financial crisis and all. Edward Liddy, company's CEO, actually compared it to catching a cold: “market-place is a pretty crummy place to be right now," he said.
"When world catches pneumonia, we get it too."
In a pathetic attempt at name-dropping, he even whined that AIG was being "consumed by same issues that are driving house prices down and 401K statements down and Warren Buffet's investment portfolio down."
Edward Liddy made AIG sound like an orphan begging in a soup line, hungry, sick from being left out in someone else's financial weather.
He conveniently forgot to mention that AIG had spent more than a decade systematically scheming to evade U.S. and international regulators, or that one of causes of its "pneumonia" was making colossal, world-sinking $500 billion bets with money it didn't have, in a toxic and completely unregulated derivatives market.
Nor did anyone mention that when AIG finally got up from its seat at Wall Street casino, broke and busted in after dawn light, it owed money all over town — and that a huge chunk of your taxpayer dollars in this particular bailout scam will be going to pay off other high rollers at its table.
Or mention that this was a CASINO UNIQUE among all casinos, one where MIDDLE-CLASS TAXPAYERS COVER BETS of BILLIONAIRES!!!
People are pissed off about this financial crisis, and about this bailout, but they're not pissed off enough.
Reality is that WORLDWIDE ECONOMIC MELTDOWN and bailout that followed were together a kind of REVOLUTION, a COUP D'ÉTAT. .......................continued.....
Rep. Thomas W. Ewing (R-IL) Cosponsored by Rep. Thomas J. Bliley, Jr. (R-VA) Rep. Larry Combest (R-TX) Rep. John J. LaFalce (D-NY) Rep. Jim Leach (R-IA)
By Sen. Richard Lugar (R-IN) Cosponsored by Sen. Peter Fitzgerald (R-IL) Sen. Phil Gramm (R-TX) Sen. Chuck Hagel (R-NE) Sen. Thomas Harkin (D-IA) Sen. Tim Johnson (D-SD)
Financial-control-frauds' "weapon of choice" is accounting.
William K. Black
Assoc. Professor, Univ. of Missouri, Kansas City; Sr. regulator during S&L debacle
Posted February 25, 2009
FBI has been warning of an "epidemic" of mortgage fraud since September 2004.
It also reports that lenders initiated 80% of these frauds.
When person that controls a seemingly legitimate business or government agency uses it as a "weapon" to defraud we categorize it as a "control fraud";
("Organization as 'Weapon' in White Collar Crime." Wheeler & Rothman 1982; Best Way to Rob a Bank is to Own One. Black 2005).
Financial control frauds' "weapon of choice" is accounting.
Control frauds cause greater financial losses than all other forms of property crime -- combined.
Control fraud epidemics can arise when financial deregulation and desupervision and perverse compensation systems create a "criminogenic environment" (Big Money Crime. Calavita, Pontell & Tillman 1997.)
FBI correctly identified epidemic of mortgage control fraud at such an early point that financial crisis could have been averted had Bush administration acted with even minimal competence.
To understand crisis we have to focus on how mortgage fraud epidemic produced widespread accounting fraud.
Don't ask; don't tell: book profits, "earn" bonuses and closet your losses
First document everyone should read is by S&P, largest of rating agencies.
Context of document is that a professional credit rater has told his superiors that he needs to examine the mortgage loan files to evaluate the risk of a complex financial derivative whose risk and market value depend on credit quality of nonprime mortgages "underlying" derivative.
A senior manager sends a blistering reply with this forceful punctuation:
Any request for loan level tapes is TOTALLY UNREASONABLE!!! Most investors don't have it and can't provide it. We MUST produce a credit estimate. It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so.
Fraud is the principal credit risk of nonprime mortgage lending.
It is impossible to detect fraud without reviewing a sample of loan files. Paper loan files are bulky, so they are photographed and images are stored on computer tapes. Unfortunately, "most investors" (large commercial and investment banks that purchased nonprime loans and pooled them to create financial derivatives) did not review loan files before purchasing nonprime loans and did not even require the lender to provide loan tapes.
Even without doing the math, you probably get that the government's financial-rescue effort is failing.
A local bank is closing a nearby branch or maybe shutting down altogether.
But do the math, and you can begin to understand how really botched this bailout has been.
Since October 2008, the government has deposited $165 billion into the accounts of the nation's eight largest banks.
Yet those same financial firms are now worth $418 billion less than they were four months ago.
And the Congressional Budget Office estimates that the government's preferred shares are worth at least $20 billion less.
In Wall Street terms, that's throwing good money after bad.
All told, the government's annualized rate of return on its investment in the nation's largest banks is -1,096%.
That's well beyond Bernie Madoff territory; he topped out at a mere -100%.
So how could $438 billion — $418 billion of their money and $20 billion of ours — go poof just like that?
Here's the easiest explanation: our banking system has sprung a leak.
Financial firms are built on capital.
They take in a dollar, borrow against it and then lend out $3, $4 or $9. Or $30.
In the past few years, executives have been using thinner and thinner capital — acquisitions and questionable off-balance-sheet-arrangements — to build their money pails.
In good times, the more of those cheap sources of capital you use, the more profitable your bank will be.
For the past few decades, banks have been piling up risk, making more and more loans based on less and less capital.
Years of economic growth, shallow recessions and record-low default rates lulled bankers into thinking that the future would resemble the immediate past, at least as far as risk went.
Turns out it doesn't.
All it was going to take was a worse-than-average recession — and it looks as though we've got one — and many banks, including a number of the biggest ones, were bound to fail.
The shockingly poor lending standards — housekeepers being approved for million-dollar mortgages — have only hastened their demise.
"This crisis needs to be understood as something that has developed over the past decade," says Joseph Mason, a finance professor at Louisiana State University's E.J. Ourso College of Business.
"This isn't just one black swan.
It's a bunch of black swans that have hung out for a while and created a giant problem."
There's little hope that the type of shares the government is buying in banks as part of the Troubled Asset Relief Program (TARP) will plug the hole in the banking system's bucket.
Paul Miller, an analyst at FBR Capital Markets who has written a number of reports on the capital issues of banks, says the only way to solve the problem is for the government to stop buying preferred shares and start taking direct ownership stakes.
Of course, the issue with that approach is that the problem at the banks is so large,
Uncle Sam may end up owning a good portion of the banking sector.
Few seem to want nationalization.
Unfortunately, that could be the only way out.
Playing with House Money
To understand why nationalization may be inevitable, you have to get a handle on the true source of the banks' problems.
The banking business — at least the way George Bailey practiced it in It's a Wonderful Life — was all about deposits and loans.
You take in deposits, on which you pay a relatively low interest rate, say 2%.
Then you lend that money to other people at a higher interest rate, say 7%.
Pocket the difference.
Repeat.
But starting in the early 1970s, banks began funding less and less of their lending with old-fashioned deposits.
Bank deposits backed 90% of all loans four decades ago.
Today it is 60%.
Where does the rest of the loan money come from?
From the bank's past earnings and the money given to it by its investors.
Using the house's money has generated higher profits — and significantly higher risks.
Regulators have long had a lower capital requirement on loans that are not backed by deposits.
But in 2004, the (REPUBLICANS!!!) Securities and Exchange Commission (SEC) removed rules that capped leverage at 15 to 1 for investment-banking firms like Goldman Sachs.
That allowed the firms to vastly expand their lending activities without raising a single new dollar of capital.
One big backer of the rule change was reportedly former (REPUBLICAN!) Treasury Secretary Henry Paulson, who was then Goldman's CEO.
By that time, the regulatory separation between investment banks and traditional banks had long been removed.
So traditional banks such as Citigroup and Bank of America shifted more and more of their lending operations to their investment-banking divisions, and leverage took off.
By the end of 2007, many banks were lending $30 for every dollar they had in the vault.
"Changing the net-capital rule was an unfortunate misjudgment by the SEC," says former SEC official Lee Pickard.
"It's one of the leading contributors to the current financial crisis." (See who's to blame for the current financial crisis.)
Another way banks sought to boost their profits — at least those available to shareholders — was through stock buybacks.
Investors cheer buybacks because they shrink the number of outstanding shares, boosting a company's profits per share and usually its stock price.
But corporate stock purchases also decrease banks' capital, because their earnings are used to purchase shares rather than retained as cash.
Worse, sometimes banks borrow money in order to buy back shares, upping their leverage and lowering their capital at the same time.
In the past four years alone, the nation's largest banks, as defined by Standard & Poor's, have spent $300 billion buying back stock.
One of the firms leading the charge to capital-light banking was Bank of America.
Starting in 1993, a predecessor firm became one of the first banks to develop and embrace computer models that were supposed to improve a bank's ability to determine the risk of a particular type of loan.
After a merger in 1998 that formed the bank, BOFA officials often argued to investors and regulators that these new advanced risk controls meant the bank needed to carry less capital per loan.
And BOFA officials frequently fought regulations that would boost capital requirements for them and other banks.
In 1998, BOFA argued that tying capital requirements to credit ratings, which would have required banks to hold more funds in the vault to account for the riskiness of subprime loans, was silly.
And to the delight of investors, BOFA was pushing for the freedom to make risky loans at the same time it was aggressively repurchasing shares.
Since 1998, it has spent $62 billion on share buybacks, according to S&P.
The result is that over the past decade, BOFA's tangible-capital ratio — the amount of tangible equity in relation to tangible assets — has nearly halved from 5% in 1998 to 2.8% in the third quarter of 2008.
It became a bank built on air.
But BOFA wasn't alone.
By early 2008, nearly all the big banks were poorly positioned to weather a downturn — particularly this downturn.
Accounting rules demand that banks take a hit to their earnings by the value of a loan when it becomes clear a borrower is not going to pay it back.
When a bank's loan losses are bigger than its income, it has to take money from its shareholders' equity account to make up the difference.
That's a big deal for a company's investors.
If shareholders' equity is wiped out, their stock is effectively worthless.
So investors watch this account intensely; if they think shareholders' equity is headed to zero, so too is a bank's stock.
FBR's Miller looked at eight of the largest financial firms in the U.S. and determined that on average, if just 3.4% of their loans go unpaid, their shareholders will be wiped out.
The good news is that these firms are so large that 3% of their loan portfolio is a really big number: some $400 billion.
The timing of when the loans go bad matters too.
If, say, 5% of a bank's loans go bad over 10 years, the bank will survive.
It can cover the loan losses with the earnings it gets from all its paying customers.
But given the way banks capitalize themselves these days, if 5% of a bank's loan portfolio goes bad in a single year, the bank is toast.
The switch to doing more lending through investment-banking operations has only made matters worse.
For deposit-based loans, the banks have wide discretion as to when they record a loss.
Some do it after a borrower misses his first payment.
Other banks wait until the loan is 120 days past due.
But for loans made through a firm's investment-banking division, the bank has to reduce the value of those debts according to what similar pools of loans are worth.
This is known as mark-to-market accounting.
And when, as they are now, investors grow increasingly nervous that borrowers will not pay back their debts, the bonds on which those loans are based plummet in value, even before payments stop coming in.
As a result, banks are watching their capital bases erode much faster than their executives ever expected — and probably faster than they can handle.
Building a Better Bailout
TARP does nothing to patch the hole in the banking system.
And it certainly doesn't do anything to encourage banks to make more loans.
Yes, banks have gotten nearly $300 billion in money from the government, and that's a lot of dough.
But it's not free dough.
In return for federal cash, the government (Sec of the Treasury Paulson)has taken preferred-stock shares as the firm's markers.
Unlike common stock, which is the kind you or I would buy from a broker, preferreds have to eventually be paid back, so these are really loans, not additional capital.
Say a bank has $5 in capital and $100 in loans.
Now the government gives the bank an additional $5 in preferred shares and says, Go make more loans.
Well, the bank might then have $200 in loans, but it still has only $5 in common shareholders' equity.
The result: if just 2.5% of its loans go bad, the bank's shareholders are wiped out.
Wisely, the largest banks in the nation lent less in the fourth quarter of 2008 than in the previous three months — a strategy that has drawn some complaints.
But that hasn't removed the pressure on their shares.
That's because the banks have had to continue to take loan losses.
And banks don't have the option to pass those losses off on the new money they got from the government.
They have to write down their common stockholders' equity first.
And as that capital falls, so too do the bank's shares.
Some are alarmingly close to zero.
No bank's stock has fallen more in value during the past four months than Bank of America's.
The combined value of its shares is now $37 billion.
That's $123 billion less than they were worth at the end of September.
In the third quarter, BOFA was forced to write down $4.4 billion in loans, or about 1.8% of its loan portfolio.
Compared with what some of its competitors wrote down, that wasn't a heck of a lot;.
Citigroup, for instance, had a $13.2 billion charge in the same quarter, primarily related to loan losses.
But the relatively small loss took BOFA's thin tangible equity, the type of capital that matters most to shareholders, down to a ratio of just 2.6% of loans, according to FBR.
By that measure, Bank of America was a weaker bank than any of its rivals, including Citigroup.
But since the market was so focused on bad loans and the charge-offs banks had to take, no one seemed to notice BOFA's faults.
That is, until the fourth quarter.
In mid-September 2008, in a deal pushed by regulators, BOFA agreed to buy Merrill Lynch.
The acquisition actually boosted BOFA's capital ratios, but it also added losses to an already fragile capital structure; Merrill Lynch lost $15 billion in the fourth quarter alone.
Knowledge of the impending losses forced BOFA CEO Ken Lewis to ask the government for an additional $20 billion in TARP funds — on top of the $25 billion it had already received — as well as about $100 billion in loan guarantees.
Without the government assistance, BOFA says, it couldn't have closed the merger.
The Merrill losses, which weren't publicly revealed until early January, have angered shareholders, some of whom have sued the company for not informing them sooner.
And last week, the losses also led Lewis to ask Merrill's top executive, John Thain** to resign for failing to keep BOFA officials apprised of his firm's bottom-line problems.
Thain says Lewis knew all along.
Cleaning Up the Mess
Nouriel Roubini, the New York University economics professor who was famously early in predicting that the end of the housing boom would cause a financial crisis, estimates that continued loan losses will force U.S. banks to come up with an additional $1.4 trillion just to stave off bankruptcy.
And since the banks aren't likely to earn much money or attract new investors anytime soon, much of the money will have to come from the government.
Regulators are split on what to do next.
The Federal Deposit Insurance Corporation is backing a plan to create what it calls an aggregator bank, ("Bad Bank") which would buy up the loans of BOFA, Citigroup and the rest of our now troubled system, theoretically putting an end to the escalating losses eating away at the banks' capital.
But if the government buys those assets at current market rates, banks would be forced to take immediate losses on the sales, doing more harm than if the government had just left the troubled loans where they are.
Sources say the Federal Reserve would prefer to let the banks keep the loans and troubled bonds for now and instead provide the banks with insurance policies guaranteeing that the government will swallow a good deal of future credit losses.
But a similar deal that the Fed struck with Citi did little to boost that company's stock or stave off fears that it may soon go under.
That's why a small but growing number of people are starting to talk about nationalization.
Speaker of the House Nancy Pelosi recently said nationalization, or something close to it, is a better solution than just buying bad assets, because if the government takeovers succeed, then taxpayers get to keep the profits when they eventually resell the banks.
But if the government doesn't turn a nationalized bank around, it could be very costly to taxpayers.
(Sounds like heads-we-lose or tails-we-lose....)
No matter what happens, things have definitely changed for Lewis and other former titans of the banking business.
A few months ago, BOFA's CEO was hailed for running a bank so prosperous that it was able to swallow mortgage lender Countrywide Financial and investment bank Merrill Lynch in the depths of the worst banking crisis in recent history.
The trade magazine American Banker named Lewis Banker of the Year in December.
Now he's fighting just to keep his job.
And even if he does, he's got a new partner.
The government already has a large stake in his bank, with its $45 billion in preferred shares.
The government's ownership could dramatically rise if the Fed starts buying common shares of BOFA, which in turn would mean that Washington would be calling more and more of the shots.
Increasingly, the only shareholder that matters to Bank of America and other banks is Uncle Sam.
Without the government, the math of the banking business these days just doesn't add up.
**Former Merrill Lynch CEO John Thain, who was ousted last week from Bank of America, defended the acquisition of Merrill by Bank Of America, saying it was the right thing to do.
Thain made the comments in a memo, which was obtained by CNBC.
In the memo, Thain also said he would pay back Bank of America for the cost of an expensive renovation of his office.
John Thain's Redecoration Refund: Will Pay Back $1.2 Million to Bank Of America
Fiscal Therapy
By David Cay Johnston
Whenever I've been invited to lecture students on how our tax system works, I have asked a simple question: What is the purpose of the United States of America?
The most common answer, be it at prestigious universities, elite prep schools, rural community colleges, or crowded urban high schools, is this:
“To make people rich”.
This answer should come as no great surprise.
For anyone born after, say, 1970, the world has been shaped by Ronald Reagan's remaking of government's relationship with private interests—a VISION of LOWER TAXES, LESS REGULATION, and MAXIMUM ECONOMIC LEEWAY FOR THOSE AT THE TOP.
In this view, the PURSUIT of WEALTH is the warp and weft of America; everything else will follow.
By contrast, the PREAMBLE to the Constitution tells us the NATION'S REASON for BEING in 52 words that can be reduced to SIX PRINCIPLES:
Society, Justice, Peace, Security, Commonwealth, and Freedom.
Individual riches don't make the list.
They are a PRODUCT of American society, not its guiding purpose.
Progress, then, must begin with a RETURN to THE BEST of the VALUES that created this Second American Republic—one born, it's worth remembering, from the FAILURE of the Articles of Confederation, whose principles (weak government, unfettered capitalism) have found their resurrection in the economic policies of the past three decades.
EVEN JUDGED by it’s OWN YARDSTICK, the TRICKLE-DOWN APPROACH has FAILED to DELIVER:
Rather than getting richer, we have been slowly impoverishing ourselves.
While INCOMES at the VERY TOP HAVE SOARED to LEVELS BEYOND IMAGINING EVEN a GENERATION AGO, the average inflation-ADJUSTED INCOME of the BOTTOM 90 PERCENT of EARNERS was lower in 2006 than it was back in 1973.
Was Posted on http://www.dailykos.com/story/2008/9/21/9322/74248/245/602838
"Once is happenstance. Twice is coincidence. Three times is Enemy Action." -- Auric Goldfinger
James Bond's wealthy nemesis may have had an obsession with gold, but he judged, quite correctly, that if people keep putting awry your plan, that likely was their intent.
In 1982, the same year John McCain entered the Senate, a bill was put forward that would substantially deregulate the Savings and Loan industry.
The Garn-St. Germain Depository Institutions Act was an initiative of the Reagan administration, and was largely authored by lobbyists for the S&L industry -- including John McCain's warm-up speaker at the convention, Fred Thompson.
The official description of the bill was;
"An act to revitalize the housing industry by strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans."
Considering where things stand in 2008, that may sound dubious.
It should.
Seven years later, the S&L industry was collapsing.
What was the cause?
Garn-St. Germain handed the S&Ls a greatly expanded range of capabilities, allowing them to go head to head with full service banks, but it didn't give them the bank's regulations.
Left to operate in an anarchistic gray area, S&Ls chased profits, indulged in amazing extravagances, and cranked out enough cheap mortgages to fuel a real estate boom. They also experimented with lots of complex, creative -- and risky -- investments, even though they didn't have the economic models to really determine the worth of the things they were buying. The result was a mountain of bad debts and worthless "assets." Does any of that sound eerily (or nauseatingly) familiar?
It wasn't a foregone conclusion. In 1985, three years after the deregulation of the S&Ls, the chairman of the Federal Home Loan Bank Board saw that the situation was already looking shaky, with the potential to become much worse. He instituted a rule to limit the amounts and types of investments S&Ls could carry on their books in an effort to head off disaster. However, many savings and loans -- among them Lincoln Savings & Loan Association of Irvine, CA, which was headed by a fellow named Charles Keating -- promptly ignored these rules.
Now enters a familiar cast of characters. First to pop up was the universally beloved Fed-chief-to-be, Alan Greenspan. Greenspan argued against the loan board's new rules, and persuaded Reagan to appoint one of Keating's pals to the board to blunt the requirements. A quintet of senators, among them John McCain, began having meetings with both the management at Lincoln and the regulators at the loan board. ] Alan Greenspan also helped out with a letter to the regulators, asking that Lincoln be exempt from the new rules. With their help of Greenspan and their pet senators, Lincoln was able to stay in business an additional two years, at the end of which they failed -- taking the life savings of 21,000, mostly elderly, investors with them.
How involved was John McCain?
McCain and Keating had known each other since 1981 and had become fast friends.
Of all the "Keating Five," it was McCain who moved into the life of the Lincoln S&L chief.
The two men vacationed together multiple times, with the whole McCain clan (babysitter included) heading out for Keating's private Caribbean property on Keating's private jet.
McCain didn't think to actually report these trips, or pay for them, until the investigators were breathing down his neck.
And McCain took his payment in the form of more than just vacations.
Keating and other members of Lincoln's parent company padded McCain's pockets with $112,000 in campaign contributions.
In John McCain's biography, he called his meetings with Keating and regulators "the worst mistake of my life," though from the text you'd think this was a spur of the moment decision, not something that McCain did repeatedly over a space of years.
Still, you might think that a "worst mistake" would stay fresh in his memory.
It certainly didn't fade quickly for the country.
Following the S&L crisis, the Resolution Trust Company was formed to swallow up the debt of Lincoln and 746 other S&Ls gone wild, and taxpayers were left with the $125 billion bill.
The resulting budget deficit forced cutbacks in other programs.
The artificial real estate boom collapsed and housing starts fell to their lowest levels in decades.
Finally, the whole nation settled in for a period nasty enough that three years later someone could still campaign around the idea "It's the economy, stupid."
Even so, by 1999 Phil Gramm -- who had entered the Senate two years after McCain and quickly become the economic guru of the Keating Five maverick -- put forward the Gramm-Leach-Bliley Act.
This Act passed out of the Senate on a party line vote with 100% Republican support, including that of John McCain.
(To be fair, the bill eventually passed again with a wide margin following revisions in the House.)
This act repealed part of the Glass-Steagall Act.
This may sound like a bunch of Congressperson soup, but the gist of it is that Glass-Steagall was put in place in 1933 to control the rampant speculation that had helped cause the collapse of banking at the outset of the depression, and to prevent such consolidation of the banks that the nation had all its eggs in one fiscal basket.
Gramm-Leach-Bliley reversed those rules, allowing not only more bank mergers, but for banks to become directly involved in the stock market, bonds, and insurance. Remember the bit about how S&Ls failed because they didn't have the regulations that protected banks?
After Gramm-Leach-Bliley, banks didn't have that protection either.
Gramm wasn't done.
The next year he was back with the Commodity Futures Modernization Act, which was slipped into a "must pass" spending bill on the last day of the 106th Congress.
This Act greatly expanded the scope of futures trading, created new vehicles for speculation, and sheltered several investments from regulation.
As with both Gramm-Leach-Bliley and Garn-St. Germain, large parts of this bill were written by industry lobbyists.
This famously included the "Enron Loophole" that exempted energy trading from regulation and was written by (big suprise) Enron Lobbyists working with Gramm.
Not coincidentally, Senator Gramm, the second largest recipient of campaign contributions from Enron, was also key to legislating the deregulation of California's energy commodity trading.
Thanks to this fortunate trifecta of Gramm-crafted legislation, Enron was able to create "EnronOnline" and trade electricity in California with absolutely no oversight or transparency.
They quickly worked out how to game the system.
Previously, there had been only one Stage 3 rolling blackout in the history of California.
Within months, the system had been manipulated by traders to generate 38 such blackouts and wholesale electrical prices had gone up more than 3000%.
Despite production capacity equal to four times the demand during winter, energy traders even engineered a blackout in mid-January.
During the confusion of these deliberate "shortages" and "price spikes," the California administration of Gray Davis -- blind to speculator manipulations because of the walls erected by Gramm's legislation -- was forced to sign energy contracts at enormous rates.
There was little choice, because most of California's public utilities were on the brink of bankruptcy from the rising wholesale prices.
In a single year, Gramm's legislation allowed speculators to bring the state to its knees.
Enron alone looted California of $11 billion.
The manipulations of the energy market were also a major factor in Davis getting the hook, helped usher the governator into power, and they still have repercussions in California's budget battles today.
By the end of that year, the depth of Enron's deception could no longer be hidden, and the whole company came crashing down in the largest bankruptcy in history -- at the time.
This brought more billions lost in mutual funds and pension funds across the country, and played a major role in the economic downturn of 2001.
But that was only the second act.
The combination of Gramm-Leach-Bliley and the Commodity Futures Modernization Act was a toxic cocktail whose total damage was greater than the sum of its parts.
The first Act promoted bank buyouts and mergers that reached such an insane pitch that the average consumer could only keep up by tracking the changing names on their checks and credit cards.
Mercantile buys Ameribanc and Mark Twain. Firstar buys Federated and First Colonial. US Bancorp buys Mercantile and Firstar.
And, because it allowed brokerages and insurance companies to mingle with banks, the Act cemented a trend that was already (and illegally) underway in which all those terms had become rather quaint.
Is Wachovia a savings bank, an investment bank, a brokerage, or an insurance provider?
The answer is "yes."
In allowing financial institutions to grow to Godzilla-sized proportions, Gramm-Leach-Bliley helped ensure that we would have financial entities that were "too big to fail."
Rather than choosing to enforce rules that kept these institutions apart, the deregulators chose to create monster bankeragasurances whose downfall (and existence) was enough to threaten the whole system.
But if Gramm-Leach-Bliley removed the limits on size and scope, these new institutions still needed fuel.
With many financial transactions operating on razor thin margins, and increasing automation sapping the profits from trading of all sorts, they needed a new way to generate the funds required to swallow their brethren in the merged fiscal corporation pond.
For that, the Commodity Futures Modernization Act was a godsend.
Among those instruments which the CFMA sheltered from regulatory scrutiny was something called the "credit default swap."
A kind of insurance one bank could exchange with another, credit default swaps supposedly made it safe for banks to take on ever riskier forms of debt.
The Act didn't invent these swaps, though they were relatively new.
Instead, by placing them in a state where they were not only unregulated but almost perfectly opaque, credit default swaps were turned into the perfect vehicle to fuel a Wall Street revolution.
No one had any idea what these things were actually worth, they were traded "over the counter" without being administered by any exchange, and even the SEC could monitor their existence only indirectly.
Who would cheer for a new kind of financial instrument that was difficult to understand, invisible to regulators, and impossible for even the whizziest of Wall Street whiz kids to value?
Guess.
More recently, instruments that are more complex and less transparent--such as credit default swaps, collateralized debt obligations, and credit-linked notes--have been developed and their use has grown very rapidly in recent years. The result?
Improved credit-risk management together with more and better risk-management tools appear to have significantly reduced loan concentrations in telecommunications and, indeed, other areas and the associated stress on banks and other financial institutions. --Alan Greenspan, 2002
Get that?
Greenspan loved credit default swaps.
He opined again and again that such instruments would be the salvation of the industry by spreading around risks.
To the mighty Greenspan, both their complexity and their lack of transparency were good things, since swaps would only be handled by the big boys who knew how to play with fire.
When questioned about his support of Gramm's legislation, John McCain called his friend (and by then, campaign co-chair) Gramm "one of the smartest people in the world on the economy" and pointed out that Greenspan also favored the acts Gramm and his coalition of lobbyists had authored.
If both Gramm and Greenspan were on his side, McCain couldn't possibly be in the wrong.
Except, of course, that he could.
From the beginning, there were plenty of people in the financial community whose opinion of these unregulated credit swaps was not as rosy as that of Gramm, Greenspan, and McCain.
Chief among those speaking in opposition was SEC Chairman, Arthur Levitt.
Levitt argued that what the industry needed was more transparency, especially when it came to complex instruments like default swaps, and he testified to this before Gramm's Senate Banking Committee,.
"In my judgment, the risk of this regulatory approach is simply unacceptable for America's investors." --Arthur Levitt, 1999
Gramm paid no attention.
Credit default swaps did allow the banks to share risks.
So much so, that banks raced each other in an effort to find more risks.
They made it possible for the down payment on homes to become 3%, 1%, 0%.
Skip the credit check, avoid the employment requirements, damn the torpedoes, full speed ahead!
We've got a credit default swap, we can do anything!
The encouragement and "safety" that credit default swaps provided made the sub-prime mortgage market possible.
Just as with the deregulation of S&Ls in the 1980s, the market was suddenly flooded with easy credit.
The result was a real estate boom, soaring home prices, and a plague of "Flip that House!" shows on cable.
As the banks piled up crappy mortgages, they heaped on ever more of the credit default swaps -- and they still had no idea how to value the things.
Worse, they began to trade the swaps themselves as if they were an investment, treating them like something worth holding instead of a big bundle of cartoon bombs whose fuses were already lit.
Since very few loans were falling into default at the time, owning a default swap seemed like a way to collect fees without ever paying out. Banks wanted more, and more, and more.
A secondary market for trading swaps exploded into existence, and swaps were traded with absolutely no consideration for the nature or quality of the underlying investment.
Swaps changed hands a dozen or more times, growing in "value" as they went.
Worse still, no one regulated who could buy a swap, so it was (and is) perfectly possible for a company to acquire swaps that theoretically cover billions of dollars in loans, even if that company doesn't have a red cent on hand to cover those swaps should the loans default.
How big did this market become?
Here's business correspondent Bob Moon and host Kai Ryssdal on American Public Media's Marketplace from back in the spring.
BOB MOON:
OK, I'm about to unload some numbers on you here, so I'll speak slowly so you can follow this.
The value of the entire U.S. Treasuries market: $4.5 trillion.
The value of the entire mortgage market: $7 trillion.
The size of the U.S. stock market: $22 trillion.
OK, you ready?
The size of the credit default swap market last year: $45 trillion.
KAI RYSSDAL: That's a lot of money, Bob.
As in three times the whole US gross domestic product, Bob. And the truth is that Moon probably underestimated. The unregulated and poorly reported credit default swaps may have actually passed $70 trillion last year, or about $5 trillion more than the GDP of the entire world.
So, are you starting to get an idea of just how big a genie Phil Gramm and his pals unleashed?
With some regularity over the last eight years, fiscal whistle blowers have tried to raise their hands and register a protest.
Um, sirs?
Is it altogether a good idea to run up debts exceeding all the assets it's even possible to hold?
But so long as no one actually had to pay off on the swaps, the party went on.
Even usually conservative (in the fiscal sense) companies like AIG started to worry that they were being left behind and leapt headlong into the swap pool.
Shortly after Greenspan's departure in 2006, the Federal Reserve took the unusual step of issued a joint statement along with the SEC to warn about the risks associated with credit default swaps.
But by that point, the damage was already severe.
If swaps lost their value, most of those who had played the game would find their giant firms abruptly valued in pocket change.
The only solution was to cover the problem with still more swaps and keep moving.
Then a funny thing happened.
After years in which banks had handed out loans willy-nilly, guarded by the indestructible swap, people and companies started to really default on those loans.
Credit slowed, home prices fell, and the whole snake started to eat itself tail first.
Suddenly, credit default swaps were not sources of limitless cash.
It turns out that an insurance policy -- even a secret, unregulated policy -- is occasionally expected to pay.
Speculators started to look at the paper they were holding and for the first time realized it could all be worthless. Worse, it could (and did) represent a massive debt; one that no one had the funds to cover.
When Bear Stearns fell apart last March, it was only suspected that a big part of the effort in saving the giant investment bank was keeping their holdings in credit default swaps from unraveling and spreading to other institutions.
Naturally, part of solving this problem involved creating a new credit default swap to cover Bear Stearn's potential debt.
But the all-purpose swap was starting to lose its power.
Shortly after Bear Stearns went belly up, AIG reported the largest quarterly loss in the company's history, taking a $11 billion hit on revaluing its holdings of swaps.
The party was definitely coming to a close.
When AIG finally collapsed this week, there was no doubt about the primary cause of its failure.
The previously well grounded company had "gotten itself involved with something called credit default swaps."
Point of irony alert:
Arthur Levitt now serves on the AIG board... or at least he did until the government had to take over most of AIG to salvage the company from the very idiocy Levitt had warned of in 1999.
This week, the Bush administration announced the beginnings of a plan to salvage what remains of the financial markets.
At first glance, it appears that the plan will consist mainly of creating a kind of "garbage pit," a fund or group of funds -- cousins of the Resolution Trust that was created during the S&L crisis -- into which those people who have dabbled in bad debts can toss their problems.
Only this time the cost to the taxpayers is at least $700 billion... and a big bite out of representative democracy.
The expansion of unregulated Savings and Loans in the 1980s brought on the collapse of that industry, a crippling of the economy, and left taxpayers holding the bag.
Maybe that was only happenstance.
Those pushing for the Garn-St. Germain Depository Institutions Act may not have known what they were doing
The deregulation of the California electricity market, along with the protections provided to Enron through Phil Gramm's lobbyist-written legislation brought blackouts, fiscal and political chaos, and left taxpayers holding the bag.
But the people who engineered that event -- people like Gramm and Greenspan -- had already seen what happened with the S&Ls.
They should have known better.
Still, perhaps that was only coincidence.
The sub-prime mortgage crisis that has not only come so close to utterly destroying the markets, but has ruined the value of many people's homes and left millions with mortgages they can't pay, was also the outcome of the deregulation created by these men. … …very predictable outcome.
When taxpayers are left holding the bag for $1 trillion this time around, it's hard to believe it's any sort of accident.
This is enemy action.
This is a bullet deliberately fired into the economy by men willing to exercise their ideology regardless of the cost to taxpayers. Men who have every expectation that they can plunder the system again and again, while the public picks up the tab.
John McCain may not have had his finger directly on the trigger, but he was there. He assisted.
These were his personal friends and philosophical comrades.
He may not be the high priest, but he has been a loyal acolyte in the cult of deregulation.
It may come as a surprise to the champions of deregulation, but nobody likes regulation.
The restrictions that were placed on banks, S&Ls, and other institutions in the 1930s weren't put there because someone thought it would be fun.
They were put in place because they addressed problems that had just been clearly and painfully revealed.
They were put in place because they were necessary.
It's bad enough if John McCain didn't know that. It's far worse if he did.
