naked capitalism

By Lynn Parramore, Media Fellow at the Roosevelt Institute. Cross posted from New Deal 2.0.

Busting unions gave Calvin Coolidge the White House, but it gave America the Great Depression.

For years, American workers’ wages have stagnated even as they produced more. Since 2008, they have been socked with staggering new bills for bank bailouts and hammered by a Great Recession brought on by the very same banks. Now public sector workers are confronted by a new crop of Republican governors who want to put an end to unions. Union workers in Wisconsin have already conceded all of Governor Walker’s draconian demands. But they want to hold on to their right to bargain so that they won’t be at the mercy of the whims of political appointees or rogue school boards. Tens of thousands have swarmed Madison to show their support for the working people of Wisconsin.

Conservatives are tasked with coming up with a narrative that makes villains out of these working folks and heroes out of the powerful people who aim to squeeze them for what’s left of their economic security.

This is not easy. And you have to admire their ingenuity. Amity Shlaes, ever the eager revisionist, has whipped up a widely parroted narrative that contains just enough truth to give it the ring of plausibility. It goes like this: Governor Scott Walker is a paragon of virtue who will soon be embraced by the American public, just like his union-crushing predecessors Calvin Coolidge and Ronald Reagan. According to Shlaes’s account, Coolidge, then governor of Massachusetts, stood boldly against badly abused Boston policemen who walked off the job in 1919 and left the city unprotected against looters. After firing the policemen, Coolidge became a national hero and was promptly swept into the Vice President’s office on a wave of popular admiration. When President Warren Harding died, Coolidge took office and it was suddenly Morning in America. As Shlaes tells it:

“Boston Police’ remained American code for the principle that union causes do not trump others. The concern that the U.S. might succumb to European-style revolutions lifted. Strikes abated. Wages rose without unions in Motor City. Private-sector union membership declined. Joblessness dropped. Companies poured cash, which they otherwise would have spent on union relations, into innovation.

Let us fill in some finer detail, shall we?

As Shlaes admits, the Boston police force had been grossly abused with long hours and horrific conditions. And it was true that there was some disorder when they walked off the job, though she somewhat overstates the case. It is also true that Coolidge’s response made his reputation as a Republican politician.

But it was not exactly popular enthusiasm that wafted Coolidge into the White House. Actually, there was a huge orchestrated effort to push Coolidge by powerful financial interests. He ended up on the ticket with Warren Harding not so much because of his overwhelming appeal to the American public – he was known for being taciturn, unsociable, and downright weird (Alice Roosevelt Longworth wondered if he had been “weaned on a pickle”). Rather, it was his overwhelming appeal to American bankers.

They knew a good thing when they saw it.

Young Coolidge, you see, had gone to Amherst College, where he had hardly any friends except Dwight Morrow, who became his bosom buddy. Coolidge went on to become a small town Massachusetts attorney representing banks, while Morrow became a senior partner in House of Morgan. When Morrow saw his pal Coolidge attracting attention in the Boston Police Strike, he wrote to everyone he knew and launched a national campaign to make a legend out of the uncharismatic Coolidge. Morrow and fellow Morgan partner Thomas Cochran lobbied tirelessly for Coolidge at the Chicago Republican Convention in 1920, and their lobbying paid off. Coolidge, first as vice president and then as president in 1923 when Harding died, became a valuable partner for the House of Morgan. Famously declaring that “the business of America is business,” Coolidge stocked his administration with enough Morgan men to fill a banking convention. Historian Murray N. Rothbard notes that

the year 1924 indeed saw the House of Morgan at the pinnacle of political power in the United States. President Calvin Coolidge, friend and protégé of Morgan partner Dwight Morrow, was deeply admired by J.P. “Jack” Morgan, Jr. Jack Morgan saw the president, perhaps uniquely, as a rare blend of deep thinker and moralist. Morgan wrote a friend: ‘I have never seen any president who gives me just the feeling of confidence in the country and its institutions, and the working out of our problems, that Mr. Coolidge does.’

Coolidge got to the White House for crushing unions, where he slept ten hours a day and hopped on and off a mechanical horse in his underpants and a cowboy hat.

Here’s what America got: the Great Depression.

Coolidge’s real legacy was a huge upward shift of income during the “roaring twenties” away from ordinary people to the rich and powerful, who got even richer and more powerful thanks to his regulatory and policy inactivity. The best Average Joe could hope for under Coolidge was for his income to hold steady. The profits from that wondrous innovation and growth that send Shlaes into rhapsodies went to fatcats who turned the country into a casino and smashed the economy.

Reagan’s history is better known – or so you would think. His firing of 13,000 striking workers was, as Washington Post columnist Harold Meyerson put it, “an unambiguous signal that employers need feel little or no obligation to their workers.” After Reagan, employers were emboldened to illegally ditch workers who sought to unionize, replace permanent employees who could collect benefits with temps, and ship factories and jobs abroad. Ever-smiling with his friendly cowboy image, Reagan tried to lower the minimum wage for younger workers, weaken child labor, job safety and anti-sweatshop laws, and do away with training programs for the jobless. He also did his best to replace thousands of federal employees with temps without civil service or union protections. Under his watch, the share of the nation’s wealth held by the richest 1 percent of Americans went up 5 percent richer. Guess whose declined?

At the time, Americans were supportive, by slim margins, of Reagan’s stance against the air traffic controllers, who went on strike to win benefit concessions from the federal government. However, the comparison with Wisconsin workers is not exactly apples to apples. These workers have agreed to concessions, and only fight to maintain their right to collective bargaining. Intuiting correctly that the public may not be on their side in this battle, conservatives have relentlessly pushed the deceptive idea that public employees enjoy higher salaries and better benefits than their private-sector counterparts. But this has been widely debunked. Careful research has shown that when you adjust for skill levels, public sector workers are not overpaid relative to private sector pay scales.
After the Great Crash, Coolidge’s bank-friendly, union-bashing policies didn’t seem like such a great gift to America. And just like in the twenties, Reagan’s signal that it was open season on unions energized a much bolder effort to hold down wages by corporate America: Over the next few years, workers by the thousands were let go, found their pay slashed, and turned into poorly paid part time employees. US income inequality reached Himalayan levels as people’s share of the benefits from increased productivity took a sharp nosedive. Today, after the Great Recession, Reagan’s anti-union attitude and enthusiasm for deregulation has also proven to be a dubious legacy.

Governor Walker says he’s fighting for ordinary Americans. So why does he want to require unions to re-certify every year, but we don’t hear a peep about corporations being required to renew their charters every year? Why does he want to control the salaries of public employees, but doesn’t have any interest in controlling the salaries of grossly overcompensated corporate CEOs? Why does he call for sacrifices from hard-working people who have been screwed by the economy through no fault of their own, and none from the financiers who caused the crisis?

Maybe it’s because he has quite a bit in common with Coolidge and Reagan after all. In Reagan’s case, as in Coolidge’s, union-busting led to some of the biggest peacetime income re-distributions in modern history. Democracy got weaker, oligopolies got stronger, the rich got richer, and the rest of us got left behind.

The real lesson from Coolidge and Reagan is this: If Governor Walker and his Republican friends are allowed to crush the public unions, you ain’t seen nothing yet

→ Washington’s Blog

In his acceptance speech for winner for best documentary at the Oscars, director Craig Ferguson said:

Three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that’s wrong.

But none of the mainstream, corporate networks covered it. Not CBS, ABC, NBC or MSNBC.

Ferguson told Reuters:

“The biggest surprise to me personally and biggest disappointment was that nobody in the Obama administration would speak with me even off the record — including people that I’ve known for many, many years,” Ferguson said backstage.

He believes Americans, who lost homes and jobs in the millions because of shady mortgage lending and bank collapses, are disappointed that “nothing has been done.”

“Unfortunately, I think that the reason is predominantly that the financial industry has become so politically powerful that it is able to inhibit the normal process of justice and law enforcement,” said Ferguson.

For background on the subversion of justice to the powers that be, see this.

Indeed, as I have repeatedly pointed out, fraud is one of the main causes of the financial crisis. See this and this.

Even Bernie Madoff tells New York Magazine:

“I realized from a very early stage that the market is a whole rigged job. There’s no chance that investors have in this market.”

***

“The SEC,” he says, “looks terrible in this thing.” And he doesn’t see himself as the only guilty party on Wall Street. “It’s unbelievable, Goldman … no one has any criminal convictions. The whole new regulatory reform is a joke. The whole government is a Ponzi scheme.”

The economy cannot stabilize unless fraud is prosecuted. But the folks in D.C. seem determined to turn a blind eye to Wall Street shenanigans, and is now moving to defund the enforcement agencies like the SEC and CFTC.

And yet the large corporate media never covers this issue. An October 2009 Pew Research Center study on the coverage of the financial crisis found that the media has largely parroted what the White House and Wall Street were saying. (The mainstream media is also pro-war.)

In fact, the financial industry has become so politically powerful that it is able to inhibit the normal process of justice and law enforcement, and the American press.

Amur tigers in population crisis BBC ;-(

After a Record Haul in Maine, Try the Lobster Mac and Cheese New York Times

Two planets found sharing one orbit New Scientist

‘Anonymous’ targets the brothers Koch, claiming attempts ‘to usurp American Democracy’ Raw Story. OK, if they are really smart, they will wipe the records of their derivatives positions and cause them to implode financially. MIght even be a systemic event, so embarrassing the officialdom about their “Mission Accomplished” posturing and getting another go at the banks would be an added bennie.

Web’s Hot New Commodity: Privacy Wall Street Journal

People power brings stability to Benghazi Financial Times. Hhm, Bengazi seems to be managing its affairs pretty well in the wake of the ouster of an autocrat. Seems to disprove US stance that a designated leader (aka our strongman) needs to be in place to prevent chaos.

Portugal faces more pressure on bail-out Financial Times

A three-part plan to tackle the Eurozone debt crisis VoxEU

Will ‘Chindia’ rule the world in 2050, or America after all? Ambrose Evans-Pritchard, Telegraph. I usually find these “when will China take over from the US” articles to be a waste of time, but this contains a very good discussion of China’s demographics.

Workers’ Uprising: Madison Capitol Protesters Ignore Gov. Walker’s Order to Leave, Key Wisconsin Republicans Defect AlterNet

The Spirit of Egypt in Madison Andy Kroll, Tomgram

That Iraq Feeling Paul Krugman. We aren’t the only ones to notice the lack of MSM coverage on Wisconsin.

Governors Scramble to Rein In Medicaid Wall Street Journal. So we are gonna kill people to avoid raising taxes on the rich? That is ultimately what this amounts to. And in case you forget why it’s called “public health”, unhealthy people and a stripped down medical system make for great disease vectors.

Commodity Shock Tim Duy

Behind a Rise in Auto Sales, Easier Credit New York Times

Antidote du jour:

By Richard Smith, a recovering capital markets IT specialist

Economics of Contempt took issue with a post I had written about a Financial Times op-ed by the Bank of England’s Andrew Haldane (and Robert May). He also attributed it to Yves…I really must get the byline habit.

To be candid, I find his piece a bit peculiar. He directs readers to focus on details, when a look at the broad-brush strokes will give a very different reading; and then the details don’t really back him up, either, if you accept his implicit challenge and get stuck into them.

Haldane’s article made a elegant and important argument: the robustness of a system has much more to do with its diversity, that is, the variability of its members, than the solidity of individual elements. Per Haldane and May, an ecology dominated by few, very large members is so unstable as to nullify the banks’ argument about the risk reduction diversification conferred by the of their businesses. And we separately know, per the experience of the Asian crisis, the global financial crisis, and to a lesser degree now with “risk on, risk off” trades, that in fearful markets, previously uncorrelated assets move together. The benefit of diversification is illusory when you most need it. In short, faith in “diversification” is yet another example of blindness to low-probability, high impact risks.

I went too fast for EoC, but his rebuttal seems to gloss over something important. The nub of his response is here:

Haldane was attempting to shoot down an argument about capital levels. It’s one thing to argue that big, complex banks are safer because risk is diversified across their balance sheets — I’ve seen plenty of people pushing that argument. But it’s entirely different to argue that because of this, big banks shouldn’t have to hold larger capital cushions. I’ve still yet to see anyone seriously push this argument, and none of Yves’ examples show anyone making this argument either.

Well, what does “safer” mean, when applied to a bank, then, in the context of diversification? I’d take it to imply something like “less likely to take relatively large capital hits from concentrated exposures”; which is to say, “able to tolerate lower capital levels, relative to less diversified institutions”. If you agree that diversification is good for banks, you assent to the proposition that bigger, more complicated banks use capital more efficiently (and I continue to maintain, contra EoC, that it’s very easy to segue from there into an argument that such banks can carry less capital, or don’t need more, even if that’s never spelt out, and still less, quantified. And why would banks be belaboring this point otherwise?).  But if you buy “diversification” you aren’t paying attention to the systemic risk angle.

Haldane highlights the misdirection and turns this argument back on the banks. Systemic risk arises from the fact that sufficiently large and ideally diversified banks end up holding similar proportions of the same damn stuff, at which point the diversification morphs, unpleasingly, into correlated losses. It doesn’t make sense to affirm that your bank is “safer”, whatever that means, because of diversification, while also admitting that in a crisis, diversification also means greater risk to the system of which your bank is a part. The diversification point advanced by Dimon and Diamond is a crock. Bank CEOs think systemic risk is someone else’s problem, and given that they’re pretty much back to BAU now, you can see how they might have got that impression. As recently as 1998 I-bank CEOs were herded into a room to get the message that they should help out LTCM, for their own good, hammered into their skulls. Times have changed.

Now, if you think diversification does not make the financial system safer, that means you need to compensate via other measures. That could mean more capital. In fact that was the PRECISE argument Timothy Geithner made to bloggers, and I presume publicly too, about Dodd-Frank. The shortcomings of Dodd-Frank did not matter if the banks had enough capital, and he was arguing Basel III would do the trick.

So you can talk capital; or you can talk structural measures, like breaking up banks. Do we see the industry itself  proposing either? If I remember correctly, the last year’s regulatory discussion did seem to involve banks and lobbies pushing back against the idea that banks needed to hold much higher levels of much higher quality capital. In fact that happened rather a lot. I will admit that Blankfein, quoted in my last, does nod to the systemic risk angle, but why are Dimon (mid 2010, just around the time Dodd-Frank was being finalized) and Diamond (late 2010, with the UK’s Independent Banking Commission cranking up to make regulatory recommendations that might include higher capital levels, or break-ups) praising their banks’ diversification, if not to keep up the lobbying push on capital requirements?

Well, if it’s not about regulatory capital, it’s to head off the proposal that the very large complex banks they have created should be broken up: that’s the other conclusion to which Haldane’s argument leads, in the Nature paper from which his FT piece is derived. It’s either more capital or breakup, whichever way up you hold it: a pincer movement. If I were a bank CEO I might start wondering whether it was a such a good idea to keep hawking the “diversification” point around.

So much for the broad-brush strokes; now for a dive into the detail, too, where, again, a close inspection gives grounds to challenge EoC. He thinks the diversification discussion, insofar as it moderates demands for extra capital, is all moot now, for the US at any rate:

Section 165 of Dodd-Frank already mandates that big banks hold larger capital cushions than other banks. That’s a statutory requirement, and not subject to regulatory discretion.

I don’t read it that way: let’s accept his invitation to plough through section 165 of Dodd-Frank. At first blush it does look as cut-and-dried as EoC says:

(a) IN GENERAL.—

(1) PURPOSE.—In order to prevent or mitigate risks to
the financial stability of the United States that could arise
from the material financial distress or failure, or ongoing activities,
of large, interconnected financial institutions, the Board
of Governors shall, on its own or pursuant to recommendations
by the Council under section 115, establish prudential standards
for nonbank financial companies supervised by the Board
of Governors and bank holding companies with total consolidated
assets equal to or greater than $50,000,000,000 that—

(A) are more stringent than the standards and requirements
applicable to nonbank financial companies and bank
holding companies that do not present similar risks to
the financial stability of the United States; and
(B) increase in stringency, based on the considerations
identified in subsection (b)(3).

(2) TAILORED APPLICATION.—
(A) IN GENERAL.—In prescribing more stringent
prudential standards under this section, the Board of Governors
may, on its own or pursuant to a recommendation
by the Council in accordance with section 115, differentiate
among companies on an individual basis or by category,
taking into consideration their capital structure, riskiness,
complexity, financial activities (including the financial
activities of their subsidiaries), size, and any other riskrelated
factors that the Board of Governors deems appropriate.
(B) ADJUSTMENT OF THRESHOLD FOR APPLICATION OF
CERTAIN STANDARDS.—The Board of Governors may, pursuant
to a recommendation by the Council in accordance
with section 115, establish an asset threshold above
$50,000,000,000 for the application of any standard established
under subsections (c) through (g).

Oh, so we have to grind off to section 115. There we find the copy’n paste merchants reposing on a mossy bank, and thumbing their noses at us; what a drafting horror this Act is:

(a) IN GENERAL.—
(1) PURPOSE.—In order to prevent or mitigate risks to
the financial stability of the United States that could arise
from the material financial distress, failure, or ongoing activities
of large, interconnected financial institutions, the Council
may make recommendations to the Board of Governors concerning
the establishment and refinement of prudential standards
and reporting and disclosure requirements applicable to
nonbank financial companies supervised by the Board of Governors
and large, interconnected bank holding companies,
that—
(A) are more stringent than those applicable to other
nonbank financial companies and bank holding companies
that do not present similar risks to the financial stability
of the United States; and
(B) increase in stringency, based on the considerations
identified in subsection (b)(3).

Oh dear, we need subsection (b)(3):

(3) CONSIDERATIONS.—In making recommendations concerning
prudential standards under paragraph (1), the Council
shall—
(A) take into account differences among nonbank financial
companies supervised by the Board of Governors and
bank holding companies described in subsection (a), based
on—
(i) the factors described in subsections (a) and
(b) of section 113;
(ii) whether the company owns an insured depository
institution;
(iii) nonfinancial activities and affiliations of the
company; and
(iv) any other factors that the Council determines
appropriate;
(B) to the extent possible, ensure that small changes
in the factors listed in subsections (a) and (b) of section
113 would not result in sharp, discontinuous changes in
the prudential standards established under section 165;

And finally we are at our destination, section 113. Subsection (b) is for foreign companies, but in subsection (a), we find the criteria for enhanced supervision – but applied to non-bank financials only; yikes. The late change to add big banks didn’t make it this far down into the act. Oops. What a mess. Happily section 115 already has the ultimate let-out for the Council, “any other factors that the Council determines appropriate”, so section 113 turns out not to matter very much for our purposes here, after all; it’s a classic Dodd-Frank wild goose chase.

Do we think the Section 115 let-out might be used? Heck, Geithner doesn’t even feel like having a stab at identifying systemically important institutions in advance of a crisis. You would think that was a pretty basic task for the Financial Stability Oversight Council (and Dodd-Frank would agree with you). So I don’t think interpreting Section 115′s “any other factors”, with as much elasticity as the occasion demands, is going to present any great problem, when the time comes. The “tailored application” of these rules looks as if it has the potential to turn that hard looking $50Bn asset size limit, above which extra regulatory requirements kick in, into something less demanding.

On the other hand, if the tour of Section 165 et al is any guide, figuring out what Dodd Frank actually means, in the heat of a crisis, might be excruciating (repeating Geithner’s discovery of the limits of his powers over AIG, Sep-Nov 2008, perhaps). It will probably depend which bit of Dodd-Frank gets tested the next time something blows up.

So there we are: EoC thinks the commitment to higher capital levels is a firm one. Having accepted his invitation to tour the detail, I think the opposite. I picture him rolling his eyes and sighing; just as I did as I trotted through the above entrancing paragraphs of Dodd-Frank. It is less horrible to wade through in its final 878-page embodiment than it was as a still-evolving 2,300-page late draft, but it’s still not a lovely read.

From a US political point of view the discussion is indeed moot, or nearly; EoC does have that right. In the UK, though, there are plenty more regulatory refuseniks: Adair Turner questions at length whether Dodd-Frank and Basel III are enough:

if global regulators were benevolent dictators designing regulations for a banking system to service a greenfield market economy, they would be wise to choose capital ratios far above even Basel III levels, something more like the 15% to 20% of risk-weighted assets which David Miles illustrates in his recent paper. And the empirical evidence is as compelling as the theoretical. Before the last 40 years or so, banking systems ran with much higher equity capital ratios, much lower leverage and yet economic growth was as high as it is today and investment as a percentage of GDP as high if not higher. (Slide 4)

There is simply no good theoretical argument or empirical evidence that we need to run banking systems with anything like as highly leverage as over recent decades. And today’s regulators are, in a sense, the inheritors of a half-century long policy error, in which we have allowed private sector banks to pursue their private interest in maximising bank leverage, at times influenced by a deep intellectual confusion between private cost and social optimality.

Tucker at the Bank of England chimes in too, in a slightly more muted style:

Bringing this together, policies on trading-book capital requirements, loss-absorbing capacity, resolution and shadow banking can all contribute towards addressing the stability-threatening problems of myopia identified in the literature. And the higher effective capital requirements that this package can deliver might potentially affect incentives by exposing debtholders to risk; and, via reducing return on equity, by harnessing the energies of shareholders in monitoring the terms of distributions to managers. In that sense, quite technical things might have significant effects over time on behaviour and the structure of the financial system. That assumes that lessons from this crisis endure. But, of course, the most pernicious forms of myopia surely come out of prolonged periods of apparent tranquillity in markets and the economy. That is when everyone gets suckered into believing the world is a safer place than it is, with elegant theories and eloquent practical stories for why the world has really changed. Which ultimately tips us from tranquillity to disaster.

I wonder if Tucker expected something like this from Geithner:

The core of the American financial system is in a much stronger position than it was before the crisis

In the US, one could just wait around gloomily to see how it all turns out in practice, though the Fed maverick Hoenig, who hasn’t quite given up on the break-up idea yet, reckons he already knows the outcome if nothing more is done:

In a 2009 article on too big to fail and the problems that resulted from the repeal of Glass-Steagall, Martin Mayer gave a very good description of where we currently stand. He stated:

“We know now that despite the violence of the shock, both the big banks and the cadre of bank regulators and supervisors—and academics—are shaking off the awful memories of 2008 and are setting up the same pins in the same alleys for the same players to try again. We will have to do this, at least, once more before we even try to get it right.”

I share Mayer’s concern that the United States is stuck in much the same game that came out so poorly this last time, but with the prospect for an even greater loss in the next game. We must make sure that large financial organizations are not in position to hold the U.S. economy hostage. But unlike Mayer, I refuse to accept that we must endure yet another crisis before we are willing to finally right the system.

There has been evidence here and there of a marked fall in new foreclosure filings. Lender Processing Services, which handles more than half of the loans serviced in the US, said its revenues in its Default Services Group were down in the final quarter of the year. Why? Its revenues are tied to initial foreclosure filings, and its were off 33%, no doubt in large measure due to the robo signing scandal. Recall that it led many banks to halt foreclosures (some all over the US, others in judicial foreclosure states only) while they inspected the state of play and scrambled to revamp procedures. Banks piously claimed that they found no problems in the correctness of foreclosure actions and that ex making the changes needed to assure affidavits were proper, they were going to be back to business as usual post haste.

Now we already know that that isn’t the case. Since the robosigning scandal broke, foreclosure activity has been down. RealtyTrac reported that foreclosures in January were up only 1% over December levels, which was down 17% from the year prior.

But RealtyTrac captures every foreclosure filing in that particular report, so it is a mix of new foreclosure filings plus additional filings for foreclosures already underway (the number of filings required varies by state, but the minimum number is three, and the number can also be increased if a borrower gets a foreclosure suspended, say by entering into a payment catchup plan, and then has the process restarted later on).

Lynn Syzmoniak of Fraud Digest provides a snapshot for January 1 through January 26 in two counties in Florida, Lee County and Palm Beach County:

Her tally for US Bank over the same period covered only Lee County, but showed similar results: 42 new foreclosures for 2011 versus 143 for 2010.

Now merely eyeballing this sample, and assuming it is representative of Florida (Syzmoniak says other counties show similar patterns), it’s clear the decline is bigger than the 33% fall that LPS mentioned for the fourth quarter of 2010 or the 17% figure from RealtyTrac.

There are reasons why Florida might show a steeper fall than other states. First, the state AG has been investigating all the major foreclosure mills in the state. Some, like the Law Offices of David Stern, have effectively folded. So there could be a bit of disarray simply due to the loss of some processing capacity.

Second, Florida, like New York, has implemented a rule requiring that attorneys verify information provided in foreclosures. That might seem to be merely ceremonial, since lawyers are already responsible for the accuracy of information provided to the court. But I am advised that this measure is more than mere belt and suspenders; it apparently would have the effect of lowering the bar for opposing counsel calling for Rule 11 sanctions if he thought the foreclosing attorney was submitting bogus documents or information. That rule did became effective February 11, 2010 (hat tip Lisa Epstein), and the foreclosure mills have tried to escape compliance. I’d imagine in the wake of the robo signing scandal, their clients are becoming less tolerant of this sort of thing.

If this pattern holds across at least across judicial foreclosure states, it suggests what we have long argued: that failures to convey loans as required by securitization documents are widespread, if not pervasive. Now that servicers and foreclosure mills are finding that a lot of judges no longer take them at their word, which means they increasingly have to provide documentation, they may be finding that a lot of their records do not pass muster. And while document fabrication was once an easy way out, that strategy is a lot riskier than it used to be.

Reader input welcome. Do you have any local data on the level of new foreclosures in 2011 versus same period 2010?

Given how many commentators believe that Greece is destined to default on its bonds (particularly since they are subordinate to any new money from the IMF and EU), you’d think they’d be putting their money where their mouth is.

But the old saw in the US is “don’t fight the Fed”. And the same logic appears to apply with the ECB. John Dizard of the Financial Times reports that perilous little in the way of CDS contracts is being written on everyone’s favorite sovereign default candidate (although the leader of Fine Gael, which will be leading the new coalition in Ireland, fired a shot of sorts across the bow of the eurozone officialdom). From Dizard’s article:

The truth is that the outstanding net CDS volume on, for example, Greek sovereign risk is less than 2 per cent of the outstanding state debt. That’s less than $6bn on about $490bn, for the dollar denominated contracts. There is more liquidity in the dollar contracts, which, given the location of many hedge funds and relative lack of official hostility to the instrument, makes sense. Even so, the derivatives tail, far from wagging the dog, is really vestigial.

The hedge funds and remaining prop trading desks are well aware of euro area official hostility to derivatives that provide a way to bet against policy. So if there are bets to be made, there won’t be many through the CDS market.

Even in the market for actual bonds, there is a reluctance to put on short positions that could be subject to official squeezes on the freedom or cost of borrowing securities. Also, with an announcement of some proposed debt crisis solution coming around the time of the March euro area summit, there could well be another short term pop in the price of peripheral market debt. Why take the risk?

Despite the lack of aggressive short selling, or buying of protection through CDS, the price of peripheral country bonds drifts lower, as real-money end buyers continue to try to be real-money end sellers. They have not, however, drifted anything close to low enough to make possible any meaningful debt relief through official buybacks. For that you can thank the ECB’s repo facilities and purchases, which have artificially kept up the price of Greek law-governed paper.

Note that this does not mean traders won’t find a way to play periphery country tsuris. It just is not likely to have sovereign debt as its centerpiece. Given that the sovereign debt crisis is deeply entwined with the efforts to prop up the banking sector, you can guess one of the first places they might look for interesting wagers.

By Matt Stoller, a fellow at the Roosevelt Institute. His Twitter feed is http://www.twitter.com/matthewstoller

Obama had a brief appearance on the Oscars, and received no applause from an audience that surely would have treated him differently two years ago. The politics of the night belonged to Charles Ferguson, who won the Oscar for Best Documentary for Inside Job. He said at the end of his acceptance speech:

Forgive me, I must start by pointing out that three years after a horrific financial crisis caused by massive fraud, not a single financial executive has gone to jail and that’s wrong.”

Ferguson has a very mild manner, but he is utterly fearless. He wants prosecutions, and he used one of the biggest stages in the world to ask for them. Ferguson has gone after the Obama administration and spares no one, as when he called Eric Holder and Andrew Cuomo “partners in crime.

Ouch. There were several shout-outs to unions tonight, including the one by “Inception” cinematographer Wally Pfister. Backstage, he said:

“I think that what is going on in Wisconsin is kind of madness right now,” Pfister says. “I have been a union member for 30 years and what the union has given to me is security for my family. They have given me health care in a country that doesn’t provide health care and I think unions are a very important part of the middle class in America all we are trying to do is get a decent wage and have medical care.”

Hollywood was torn apart by a strike a few years ago, so this is not surprising.

Ferguson really stood up and made his case. It would be interesting if people started asking President Obama, Attorney General Holder, current New York Attorney General Eric Schneiderman, former Attorney General Andrew Cuomo, and others in power where they think he’s gone wrong.

Update (by Yves) 3:00 AM: Curious, no mention of Inside Job in the New York Times’ story on the Oscars, when they did mention the foreign language film, makeup and best score recipients.

I’ve gotten messages but don’t see any news items yet (you can apparently find confirmation on Twitter, @AndrewKroll, @ddayen, and PRNewswatch for instance) that the police in Wisconsin have announced they will begin arrests to clear the capitol building. It’s to start at 4:00 PM Central, so it is now in process.

Hundreds have said they are willing to be arrested. Human chains were formed around the capitol.

Wonder what happens when they run out of local jail space. Will they just haul protestors to the police station, arraign them, and release them? The first wave will presumably be incarcerated, but how far can they go with this, given the numbers involved?

Update 5:40 PM Live feed, hat tip a kind anon.

Update 6:50 PM: Rather curious absence of MSM coverage, apparently only a couple of minutes on CNN.

Rare, Unique Seeds Arrive at Svalbard Vault, as Crises Threaten World Crop Collections ScienceDaily (hat tip reader furzy mouse)

Doodling in Math: Sick Number Games Barry Ritholtz

The historical roots of yoga Tyler Cowen

Gasland and Natural Gas Drilling Ed Harrison

Regulation Lax as Gas Wells’ Tainted Water Hits Rivers New York Times (hat tip reader Crocodile Chuck)

Exclusive: Military’s ‘persona’ software cost millions, used for ‘classified social media activities’ Raw Story. Eeew, and Anonymizer is part of the dark side (not that I’ve used it, but techie friends recommended it years ago)

WikiLeaks: How U.S. tried to stop Spain’s torture probe Miami Herald and The Spanish Investigation into U.S. Torture Center for Constitutional Rights (hat tip reader furzy mouse)

Tripoli slipping from Gaddafi’s grip Financial Times. Wow, this is happening quickly.

Long Bread Lines and Barricades in Libya’s Capital New York Times

Live Blog – Libya Feb 27 Aljazeera

“I Won’t Pay” movement grips debt-ridden Greece Associated Press

Premier Wen: China’s rise lies in talents, education, not GDP Xinhua Wen chats weekly with “netizens”. Even though this is theater for the masses, Team Obama has yet to add this one to its repertoire.

Forget fuel costs, U.S. farmers cheer oil surge Reuters (hat tip reader Deus-DJ)

Protesters out in force nationwide to oppose Wisconsin’s anti-union bill Los Angeles Times

Scott Walker’s ruthless ambition Guardian (hat tip reader May S)

Sign Optimization Angry Bear

Why Wouldn’t the Tea Party Shut It Down? Frank Rich, New York Times

Waiting Seven Years for Two Answers Gretchen Morgenson, New York Times

Rep. Waters says proposed $20 billion settlement falls short of servicing goals HousingWire

Exchange Rates: Two Stylized Facts and Yet Another (Consequent) Puzzle Menzie Chinn. When I was young, high yielding currencies were viewed with skepticism, since the assumption was depreciation was in store in the not-too-distant future.

Eliot Spitzer: Wall Street’s fallen angel Guardian (hat tip Joe Costello)

Antidote du jour:

Yves here. As we noted in January,

Treasury Secretary Timothy Geithner is trying to duck the assignment given the Financial Stability Oversight Council under the Dodd Frank legislation, namely, that of identifying “systemically important” financial institutions….The Treasury devised a list of banks it subjected to stress tests; conceptually, how is this process any different?

I’m pleased to see four professors from New York University’s Stern School take up this task. And they end their analysis with a rebuke:

This is the easy part for the Financial Security Oversight Council. The tough part is to then design efficient regulation that discourages the build up of excessive risk.

By Viral Acharya, Thomas F. Cooley, Robert Engle, and Matthew Richardson. Cross posted from VoxEU.

As part of the US policy response to the global crisis, the Dodd-Frank Financial Reform Act calls for regulators to identify systemically risky financial firms – the sort that took the US financial crisis global. But how to identify these firms remains unclear. Some claim the task is impossible. This column begs to differ and names the 10 most systemically risky financial firms in the US.

The Financial Stability Oversight Council is beginning to confront its various mandates under the Dodd-Frank Financial Reform Act. These include implementation of the Volcker Rule, the establishment of concentration limits for financial firms, and the procedures for designating systemically risky financial “utilities” (Acharya et al 2010). While all of these steps may enhance financial stability, arguably the most important step is the identification of systemically risky firms. After all, the market failure of the financial crisis was that firms created massive amounts of systemic risk without “paying” for it.

It was somewhat disconcerting that Treasury Secretary Timothy Geithner, who is the Chairman of the Financial Stability Oversight Council, believes “creating effective, purely objective criteria for evaluating systemic risk is not possible” (Nicholson 2011).

This simply isn’t true. And, the Council’s initial proposals miss what is the critical element in such risk assessment, which is the extent of correlation between the risk of a firm and the whole financial sector. Their primary focus on firm size and firm capital (based on current risk assessments) misses this entirely.

Objective criteria can identify the majority of systemically risky firms and their contribution to risk. And if a few are missed, the Council can add to the mix using more subjective information.

Lessons from September 2008

While the financial crisis started in the summer of 2007, it was not until the early autumn of 2008 that systemic risk fully emerged. Around this time, Fannie Mae, Freddie Mac, Lehman Brothers, AIG, Wachovia, Washington Mutual, and effectively Merrill Lynch and Citigroup, all failed. An important insight is that this risk was due not just to these failed financial firms, but also to other large banks, investment banks, and insurance companies that were struggling. In a financial crisis, it is the capital shortfall in the system as a whole that causes financial markets to freeze with devastating follow-on effects for the real economy.

And after the capital shortfall in late 2008, over the next 3-4 months, the economy fell off a cliff. Stock markets worldwide fell between 40%-50%, GDP dropped 3% in developed nations and international trade fell 10%. The link between the financial sector’s undercapitalisation and economic collapse is unmistakable. For that reason alone it is imperative to measure the build-up of systemic risk.

The first step then is to be clear about what constitutes systemic risk. A natural assumption is that systemic risk emerges when the aggregate financial sector falls short of capital, and that the costs of this risk increase with the magnitude of the shortfall. Given this assumption, everything follows. Economic theory provides a precise measure of systemic risk for a financial firm (see for example Acharya 2010a, 2010b). It consists of two parts. First, the costs to society of a systemic crisis measured per dollar of capital shortage in entire financial sector, times a second part which is the firm’s anticipated contribution to the capital shortage in that sector.

The first term – expected systemic costs – is difficult to measure precisely, but it is the same for all firms, so it has no impact on which firms are systemic on a relative basis. The second term, formulated as the anticipated percentage contribution of the institution to costs incurred in a financial sector collapse, is clearly measurable.

With our colleagues at the NYU Stern School of Business, we have done just that using publicly available stock return and balance-sheet data for financial firms in the US. We are currently in the process of expanding our work to European and Australasian firms. The analysis is provided as the measure SRISK% (% contribution to systemic risk) on the NYU Stern Systemic Risk Rankings page here.

This calculation takes three steps.

First, it estimates the daily drop in equity value of this firm that would be expected if the aggregate market falls more than 2%. This is called Marginal Expected Shortfall (MES). The measure incorporates the volatility of the firm and its correlation with the market, as well as its performance in extremes. These are estimated using asymmetric volatility, correlation and copula methods similar to those in other sections of VLAB (for econometric details see Brownlees and Engle 2010).
In a second step this is extrapolated to a financial crisis which involves a much greater fall (eg, 40%) over a much greater time period (six months).
Finally, equity losses expected in a crisis are combined with a measure of the financial firm’s leverage (LVG), measured using current equity market value and outstanding measures of debt, to determine how much capital would be needed in such a crisis. A firm is assumed to require at least 8% capital relative to its asset value.
Then, the Systemic Risk Contribution, SRISK%, is the percentage of financial sector capital shortfall that would be experienced by this firm in the event of a crisis. Firms with a high percentage of capital shortfall in a crisis are not only the biggest losers in a crisis but also are the firms that create or extend the crisis. This SRISK% is the NYU Stern Systemic Risk Ranking of the US Financial sector.

As an illustration, applying these methods in July 2007, of the top 10 systemic firms, Citigroup, Merrill Lynch, Freddie Mac, Lehman Brothers, Fannie Mae and Bear Stearns all show up. By March 08, AIG, Bank of America and Wachovia enter into the top 10 rankings. Currently, the biggest contributor to risk by a wide margin is Bank of America and the top five riskiest firms account for over 70% of the risk.

As another illustration, we report below the top 10 systemically important financial institutions, as per SRISK%, using our analysis up to the week of 20 February 2011. Just five institutions are anticipated to contribute to up to 55% of the financial sector’s under-capitalisation in case of a market-wide crash, with Bank of America alone contributing 17.5%, not just because of its size but also due its high correlation with the market and relatively high leverage (contrast, say to JPMorgan Chase). Several nation-wide insurance firms show up as significant contributors as well. And, Citigroup and AIG still rank at number two and five, respectively, even though their immediate problems may have been resolved through government backstops.

Figure 1. Systemic risk top ten (as of 20 February 2011)

Words of caution

There is no doubt that relying only on publicly available data has issues. The financial crisis is the poster child for manipulation of leverage numbers. But these statistics can be supplemented with a more thorough micro analysis of each financial firm by regulators using confidential information and all the tools at their disposal. The Council cannot argue this is beyond their capabilities because, in fact, the US government already did this for 20 financial firms in 2009 when they conducted the highly regarded stress tests of these firms. These stress tests were completely analogous to the above measure of systemic risk, and to our statistical calculations mentioned above. Our statistics align well with the government’s stress tests (see Acharya 2010a).

The advantage of objective criteria based on traded market data is that it is very difficult for financial firms to manipulate these numbers. The statistical methods can provide estimates in real time. As a check, and also as a more careful update, periodic stress tests can be performed which provide alternative estimates of the exact same systemic risk measure. And the newly legislated Office of Financial Research can collect exclusive regulatory data on inter-connections of financial firms to augment such estimates. It is important that firms that want to avoid systemic prudential regulation have clear paths to follow. They can de-lever, de-merge, and decline the bets of the rest of the sector.

This is the easy part for the Financial Security Oversight Council. The tough part is to then design efficient regulation that discourages the build up of excessive risk.

By Matt Stoller, a fellow at the Roosevelt Institute. His Twitter feed is http://www.twitter.com/matthewstoller. Cross posted from New Deal 2.0

If NFL fans are demanding negotiations be opened up, why are homeowners kept in the dark?

Zach Carter wrote a good piece on homeowners’ demands of the big banks. National People’s Action has coordinated thousands of homeowners in asking for an aggressive settlement with the banks on their handling of foreclosures. Iowa Democratic Attorney General Tom Miller, who is heading the 50-state investigation, is one of their prime targets.

But it’s this video that makes it interesting.

Here’s the transcript, starting at around :53 into it.

Iowa citizen Mike McCarthy: How close are we to a settlement? And with the settlement, will we have mandatory modifications? Will we have mandatory principal reductions? Will we have restitution for families who were fraudulently kicked out of their home? And also we want to see that these bank officials who were responsible for committing mortgage or foreclosure fraud brought up on criminal charges. I’m gonna ask you again, like I did on December 14. Are we gonna put some people in jail?

Iowa Attorney General Tom Miller: We’re really getting close to negotiations. I’m not gonna talk about, I really feel I shouldn’t talk about what’s gonna be in the agreement, what’s not gonna be in the agreement. That’s something we have to hammer out with the Justice Department, and the Federal people, and the banks in a negotiating session. So in terms of talking to you or to the press, we’re pulling back on specific details.

Look at what he’s saying. Miller has decided that he will keep the public in the dark about the negotiations over how banks will deal with the homeowners they hurt. They can’t know when decisions will be made. They can’t know if they will have principal reduced. They can’t know if they will get loan modifications. They can’t know if they will get restitution if they’ve been illegally kicked out of their homes. Miller will not even speak to criminal prosecutions of bankers over mortgage fraud because he is still negotiating with the criminals over whether to bring charges.

The backstory here is that Miller had exuberantly vowed jail time for bankers to Iowa citizens, before backtracking on his commitment. This level of deception by high officials is now routine when it comes to cracking down on lawbreaking by big banks.

It’s not obvious to me why Miller backtracked. I don’t think he ever had any intention of charging any bankers with any criminal charges, that’s just not how law enforcement works these days. My guess is that he didn’t realize that his initial promise to Iowa voters would be taken seriously, and then it blew up in the press. So he decided to stop talking and do the negotiating in secret.

This is not reasonable. If the NFL is being asked to open its books and NFL fans are asking that the negotiations between the players and owners take place in the open, surely the talks over foreclosure fraud can be done with some ability for the public to know what is happening.

Tom Miller may not realize that keeping homeowner victims in the dark while negotiating with the perpetrators is the wrong way to approach criminal activities. But the rest of us do.

Ambrose Evans-Pritchard of the Telegraph voices his concern that central banks are going to misread the impact of rising oil prices and therefore make the wrong interest rate decision. Bear in mind that Evans-Pritchard called the 2008 oil spike correctly, deeming it to be a bubble, and was also in the minority then in arguing that deflation was a bigger risk to the economy than inflation.

One leg of his argument is that oil price increases slow economic growth. That’s hardly startling; indeed, this concern has been echoed widely in the last few days. For instance, as David Rosenberg notes, courtesy Pragmatic Capitalism:

It is also interesting to see how government bond markets are reacting to the oil price surge — by rallying, not selling off. In other words, bond market investors are treating this latest series of events overseas as a deflationary shock.

Evans-Pritchard highlights several issues: no one seems to have a good measure of the impact, but there is reason to think it is larger than most central bankers allow for. And it also appears to be subject to inflection point effects, where increases beyond certain thresholds have disproportionate effects:

The classic theory by Rotemberg and Woodford (1996) is that a 1pc rise in crude prices cuts 0.25pc off US output over six quarters or so. If they are anywhere near correct – and the “energy intensity” of the US economy has diminished over time – the sort of 40pc rise since last summer rise will indeed have a severe effect. Subsequent scholarship suggests this is too extreme, unless central banks behave like idiots.

Deutsche Bank says US crude at $120 a barrel would push oil costs to 5.5pc of global GDP, the trigger level that has historically caused upsets….

Eduardo Lopez, a veteran oil watcher at the International Energy Agency, said the world was already “approaching dangerous waters” before North Africa blew up. He places the inflexion point at around $90 for US crude.

The second leg of his argument is that central bankers run the risk of raising rates too early. He contends that they are about to repeat the mistake they made in 2008, of ignoring the contraction in broader measures of money:

Conjuring ghosts of the 1970s is a certain formula for error. In that era M3 money was exploding. A wage spiral was well under way. There is no such pressure now (except, arguably, in Germany). After a spurt last year, M3 is contracting again in Euroland and the US on a month-to-month basis.

China, India, and parts of the emerging world may well be in a 1970s bind, but 60pc of the global economy is not.

The conundrum here is whether you believe some of the commodities price rises to be the result of financial investors using commodities futures as an inflation hedge is leading to distortions in the real economy. Even though Serious Economists pooh pooh this notion, economists at the UN’s Food and Agriculture Organisation, who have mucked around with the data, take the idea seriously. And one can construct transmission mechanisms. Long financial investors buy index futures, increasing their prices. Because all right thinking people have been trained to believe that market prices have information content, the futures price is taken to mean that Informed People think Stuff is Gonna Get More Expensive Soon.

So what do rational actors do? They run around and buy up physical supplies and maybe hedge too. And if you are a big commercial user, you probably have your own storage facilities, which will not show up as official inventories. Even retail hoarding can have an impact on demand. During the oil crisis, when gas stations moved to even-odd day fillups (based on license plate numbers), consumers kept their gas tanks fuller than normal. So even though any price move in the spot market would entail hoarding (as Serious Economists have said), a lot of those inventories would not be captured in official statistics , leading economists to then declare that the price change was the result of fundamental forces.

In effect, the authorities seem to have convinced themselves they have decent measure when they don’t. They’d probably do better to look at qualitative indicators as well as any data they can get their hands on, but most economists have an acquired allergy to anything that cannot be forced through a regression analysis.

But the concern that low interest rates are goosing asset prices hardly seems farfetched. Whether Bernanke admits it to himself or not, his program certainly looks like an effort to raise housing and stock market prices and hope the economy follows. And it is therefore entirely logical to expect “substitutes” for these targets, like storable commodities, to also be affected by monetary easing. While the US is so keen to continue to prop up asset markets to help its buddies in banking that the notion that the Fed will be too quick to raise rates does not seem credible. However, with Turbo Timmie loudly proclaiming that the economy is on the mend, the officialdom here is at risk of starting to believe its own PR.

That in turn means central banks may have no way out. They may not be able steer a road between inflation and a resumption of Japanese-style low growth and borderline deflation. They can only choose one or the other.

Mouse heart ‘re-grows when cut’, study shows BBC. This is no doubt useful, but who dreams up these experiments?

Voodoo ritual sparks fatal New York apartment fire BBC

How My Smart Phone Got Me Out Of A Speeding Ticket In Traffic Court SkatterTech

WikiLeaks now selling merchandise TechBlorge. A reminder that a NC t-shirt is long overdue…but a site facelift probably comes first.

Libya: Gaddafi’s billions to be seized by Britain Telegraph (hat tip reader furzy mouse). Hhhm. He must not have gotten the money into the offshore part of British banking. If you do it correctly, it is apparently not traceable. Gaddafi seems to be very much in denial about the idea that he could be ousted.

‘The Revolution Is Not Yet Over’ New York Review of Books

“Shame, Shame!”: Dems Protest As GOP Rams Through Vote on Walker’s Bill AlterNet (hat tip reader furzy mouse). If the Dems in the Senate had any thought of returning soon, this should give them pause, big time.

Wisconsin State Senate Makes Budget Repair Bill Unamendable Dave Dayen

The Housing Bubble and Negative Equity are a Major Predictor of State Budget Gaps, Not Unions Mike Konczal

Really Bad Reporting in Wisconsin: Who ‘Contributes’ to Public Workers’ Pensions? David Cay Johnson

Silicon Valley hubris watch, Mary Meeker edition Felix Salmon

Tennessee bill would jail Shariah followers The Tennessean (hat tip reader furzy mouse)

Transmission Channels Sarah Woo, Credit Slips

Corporate Profits Soaring Thanks to Record Unemployment Economic Populist

Retail Sales have not Recovered Normalized to Population John Lounsbury, Credit Writedowns

Oil price spikes set grim precedents Financial Times

Geithner’s Gamble Simon Johnson, Project Syndicate

Antidote du jour:

Aargh, it is frustrating to see how quickly establishment-serving shallow arguments become conventional wisdom. We get a big dose of this line of thinking from the New York Times’ Joe Nocera in an article titled, “Biggest Fish Face Little Risk of Being Caught.”

Now you can’t disagree with the conclusion: no major banking industry figure is going to be brought to justice. But the explanation he offers is incomplete and misleading, and serves to misdirect the public from more fundamental and more troubling causes.

At the start of the piece, Nocera recounts some of the unsavory acts of Countrywide’s Angelo Mozilo, and mentions in passing two other prime suspects, AIG’s Joe Cassano and Lehman’s Richard Fuld. Then he points to the decisions not to pursue criminal prosecutions of Mozilo and Cassano, and recites oft-repeated arguments. First, it’s too costly. The S&L crisis required a huge commitment of resources by the FBI, that ain’t happening now. Second, it’s too hard. Look at how the prosecution of two hedge fund managers at Bear Stearns failed. Third, the top brass has successfully insulated itself from the really bad actions at their firms.

Let’s deal with these arguments in reverse order. The logic of leadership in America is fundamentally perverted, in that the top brass takes credit and huge paychecks for organizational successes, but is nowhere to be found when their organizations go off the rails. But in the case of Mozilo, Nocera’s list of possible charges that could be laid is revealingly incomplete:

But this case, too, would have been awfully difficult to make. Countrywide’s descent into subprime madness was hardly a secret. It made all sorts of crazy adjustable rate mortgages that required no documentation of income; its array of products was also well known and disclosed to investors. Indeed, Mr. Mozilo was quite vocal and public in saying that the housing market was due to fall, and fall hard. But he always assumed that whatever its losses, Countrywide was so strong that it would be one of the survivors and would feast on the carcasses of its former competitors. No internal e-mail he wrote contradicted that belief.

Was there outright fraud at Countrywide? Of course there was. That is a large part of the reason that Bank of America, which bought Countrywide in early 2008, has struggled so mightily with the legacy of all the Countrywide loans now on its books. But most of the fraudulent actions at Countrywide took place at the bottom of the food chain, at the mortgage origination level. It has been well-documented that mortgage brokers induced borrowers to take loans that they never understood, and often persuaded them to lie on their loan applications.

This is really flattering to Mozilo. First, the statement, “fraudulent actions at Countrywide took place at the bottom of the food chain” suggests that it was low level employees operating on their own. Huh? Countrywide had the best organized call centers in the industry. It has been widely reported that the bank would call borrowers six months after a loan closing and tell them, falsely, that a reset was imminent in order to get them to refi quickly and generate more fees for the bank. Similarly, Countrywide would also advertise specials, most often for no-fee loans. Ex employees have told me that it was a pure bait and switch. The call centers were armed with scripts to tell callers why that product was not good for them and another one was more suitable. My source have told me they are highly confident none of the advertised loans was every sold.

This point to institutionalized patterns of deception, involving senior managers, not low level employees out of control.

Similarly, Nocera suggests investors knew Countrywide’s loans were drecky. That too is misleading. The bank made specific representations about the quality of the loans they were making, and now a number of court cases allege the bank violated those promises by putting far worse loans into its deals. So the idea that the investors knew what they were buying is a canard, and one Nocera surely knows about, and chooses to overlook.

He also ignores what would appear to be an easily provable instance of chicanery, although it may not rise to the criminal level: the “friends of Anglo” program, in which Congressmen were given Countrywide mortgages on extremely favorable terms (I’m told that this program was “marketed” very aggressively to the members of various financial services industry oversight panels). This may be more of a problem from the recipient’s end, since it would seem to run afoul of all sorts of ethics rules. But I imagine a creative litigator could find in it a cause of action against Countrywide, and better yet Mozilo, since he was by all accounts personally involved in this initiative.

Let’s work back to Nocera’s second argument, that these cases are hard to win and the failed Bear hedgie case proves it.

Yes, financial fraud litigation is hard to win. But a single data point proves very little. This case was a clear example of inept prosecution. As Nocera does correctly depict, the feds tried to build a case on e-mails taken out of context, when other e-mails painted a very different picture. This was world class bad preparation (and confirmation bias). This isn’t even a matter of failing to probe witnesses for possible exculpating or confounding information; this is a failure to read documents the prosecution had in hand and connect the dots.

Now this points to a separate issue: the weakened state of the various offices that ought to be chasing banking industry crooks. But using current bad performance to say it’s inevitable is also lame. We’d never accept that from military or a sports team; why are we willing to accept subpar performance from something as important as criminal justice professionals? As we’ve indicated, top law school grads flock to kick-ass prosecutors, so this problem could be turned around faster than most imagine.

And he also has the wrong implicit standard. The goal is not to win every case, or even most cases. It’s to win enough to be a threat and not to lose them in the embarrassing fashion of the Bear case. And prosecutions that fail can still be powerful deterrents. They put information in the public domain that private litigants can use to mount civil cases.

If finance cops can mount credible lawsuits, filing suit will send a chill through the targets. That’s the sort of situation we need to have, that top financial executives see that criminal prosecution is something to be feared.

Let’s finally turn to Nocera’s first reason: it’s too costly, and the successful effort during the S&L crisis depended on the FBI throwing a lot of horsepower at the problem. But this is the wrong analogy. First, we are three years past the crisis, and a lot of forensic have been done. They are not complete, we’ve railed at the important gaps, but this is not a tabula rasa.

But the S&L crisis is not the right model. These cases are much more like Enron, where a number of executives were in cahoots in both creating questionable products and presenting a misleading picture to the outside world. And the Enron case did not start at the top. It used the same model that prosecutors have perfected with the Mafia and drug rings: go after the foot soldiers, get them to turn state’s evidence in return for immunity. For financial crimes, that also vastly lowers the cost of prosecution. The cooperating insiders provide the road map and enable the prosecutors to do much more focused discovery, as well as potentially serving as witnesses.

But why could prosecutors take that approach with Enron? Because it had already failed. We are back to fundamental mess the officialdom has created by leaving the management and boards of bailed-out companies in place. Any systematic investigation of crimes committed during the crisis would also target managers and executives now in place. It would be tantamount to a criminal investigation of the entire enterprise. And we can’t have major financial institutions subject to tha level of scrutiny, now can we? Trying to build a case against a Mozilo any other way is indeed too hard.

So we are back to the same ugly fact set. The overly generous terms of the TARP, and the failure of Team Obama to force management changes on the industry in early 2009 was a fatal error. It has embedded and emboldened a deeply corrupt plutocracy. The only way to go after them, as Eliot Spitzer suggested in the movie Inside Job, may be to target lower and mid-level employees on the widespread and well accepted practice of having securities firms pay for prostitutes and drugs out of research budgets. All it would take is a sufficiently bloody-minded prosecutor. But that sort of individual is notably absent from any of the perches where he could take on this mission. Given what happened to Spitzer, that seems to be no accident.

The Colbert Report did a fine job of recapping the issues in a smear campaign that was being planned by the so-called cyber security firm HB Gary (along with Palantir and Berico Technologies) against journalists who defended WikiLeaks, in particular Salon’s Glenn Greenwald.