Yves here. The Washington Post reports tonight that there is some pushback about the decried-by-anyone-who-knows-bupkis-about-securities-markets-and-isn’t-on-take JOBS Ac, which appears to be certain to be signed into law.
Bill Black reminds us that tons of absolutely terrible financial regulation (as in deregulation) over the last 25 years have passed with large margins.
Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives.
The imminent passage of the fraud-friendly JOBS Act caused me to reflect on the fact that the worst anti-regulatory travesties in the financial sphere have had broad, bipartisan support. The Garn-St Germain Act of 1982, which deregulated savings and loans (S&Ls) and helped drive the debacle, was passed with virtually no opposition. The Texas and California S&L deregulation acts – the two states that “won” the regulatory “race to the bottom” – passed with virtually no opposition. Texas S&L failures caused over 40% of total S&L losses and California failures caused roughly 25% of total losses. In 1984, a majority of the members of the House of Representatives, including Newt Gingrich and most of the leadership of both parties, co-sponsored a resolution calling on us to cease our reregulation of the S&L industry.
The Competitive Equality in Banking Act of 1987 (CEBA) was the product of two cynical political deals. The context was that the Reagan administration refused to allow the Federal Savings and Loan Insurance Corporation (FSLIC) to admit that there was a crisis requiring governmental funds and refused to allow FSLIC to draw any funds on its Treasury credit line. We had spent all but $500 million in the FSLIC fund closing some of the worst S&L control frauds. The S&L industry had over $1 trillion in liabilities and was deeply insolvent, so we were running the insurance fund on fumes and dreading a potential nationwide run. Treasury and FSLIC ginned up a convoluted means of FSLIC receiving the proceeds of a $15 billion (FICO) bond issuance. The repayment of the FICO bonds rested in large part on taking capital and future earnings from the Federal Home Loan Banks (FHLBs). The industry owned the FHLBs, so the S&Ls’ interest in the FHLBs’ capital was treated on their financial statements as an asset. Using the FHLBs’ capital to “defease” the FICO bonds refduced every S&L’s reported capital. The exceptionally powerful S&L trade association (the “League”) opposed the plan. It preferred that the government, rather than the healthier members of the industry, pay to resolve failed S&Ls. Trade associations also do not want to lose members through government closures.
The S&L control frauds saw the FSLIC recapitalization bill as an opportunity. They had disproportionate political power because political interference was their best guarantee of delaying our closure of their S&L. My contemporaneous joke was that the frauds’ always obtained their highest return on assets from their political contributions. The frauds’ priorities were to make it far harder for the regulators to take action against them and to get FSLIC to use its funds to bail out failed S&Ls rather than close them. A large FSLIC recapitalization could be a very good thing for the frauds if the funds were given to “their” S&Ls while they remained in control.
The first political deal was between the frauds and the League. It was called the “Faustian bargain.” The League agreed to support “forbearance” provisions drafted by the frauds’ lawyers that were cleverly designed to make it difficult for us to take enforcement actions and appoint receivers. The frauds agreed to stall passage of the bill and to support the League’s proposed reduction in FICO bond issuances to $5 billion. (The contemporaneous joke was that if we flew into DFW rented a car and drove towards downtown Dallas we would exhaust the $5 billion closing the failed S&L we passed en route before we made it to Dallas.) The S&L frauds in Texas had exceptional political power. The Faustian bargain worked. Speaker of the House James Wright held the FSLIC recapitalization bill “hostage” to extort regulatory favors for a series of Texas S&L frauds and a huge bankrupt borrower from the frauds. Charles Keating, who controlled Lincoln Savings, had already used Alan Greenspan as a lobbyist (plus large political contributions) to recruit the five Senators (Cranston, DeConcini, Glenn, McCain, and Riegle) who would become infamous as “the Keating Five.” They made a secret bipartisan effort in April 1987 to prevent the agency from taking enforcement action against Lincoln Savings’ massive, fatal violation of the rules restricting direct investments. (Speaker Wright later joined their effort.) Senator Cranston, at Keating’s behest, put a secret “hold” on the FSLIC recapitalization bill in 1986. The combined efforts of the frauds’ political cronies prevented passage of the bill in 1986.
The second cynical deal was struck in 1987 by the Reagan administration and Speaker Wright. Wright agreed to withdraw his opposition to the $15 billion size of the FICO bond issuance. Treasury Secretary Baker agreed that the administration would not reappoint Edwin Gray as Chairman of the Federal Home Loan Bank Board (Bank Board) and that the administration would not oppose the forbearance provisions, drafted by the frauds’ lawyers, which the House had added to the bill. To no one’s surprise, Wright paid only lip service to the deal. He gave a speech announcing that he now supported the $15 billion FICO issuance, but his minions spread the word that he actually supported the version of the bill that allowed only a $5 billion FICO issuance. The League deployed its crisis reaction force in support of the Speaker. Five hundred senior S&L executives, each a significant political contributor on a first name basis with members of the congressional delegation, agreed to be in DC walking the halls of Congress within 48 hours of receiving the League’s call for grassroots lobbying. My psyche still bears the scars of this combined onslaught. It was the political equivalent of being on the receiving end of a B 52 Arc Light (carpet bombing) mission in Vietnam. We were crushed in the House on the effort to get authority to issue $15 billion in FICO bonds. We lost a majority of Republicans, including much of the leadership, and almost all the Democrats.
In 1993, “Reinventing Government” had total bipartisan support. Vice President Al Gore led the Clinton administration effort. Reinventing government was premised on the view that government was a failure and the private sector was a success that the public sector should emulate. I will mention only two of the anti-regulatory policies that it led to in banking. In 1993, the Clinton administration killed the Bank Board’s loan underwriting rules that had proven successful and essential in stopping the S&L debacle and suing and prosecuting the control frauds that drove the crisis. The old rule is what we used in 1990-1991 to stop S&Ls that were making liar’s loans. This was the single most destructive rule change in banking rules in the most recent financial crisis.
“Reinventing” proponents ordered the banking regulators to refer to banks as our “clients” and to think of them as clients we were to serve. Texas Governor George Bush shared Gore and Clinton’s passion for the “Reinventing Government” movement and expanded their anti-regulatory policies. There is no more destructive regulatory mindset short of outright corruption than viewing the industry as your “client.” It makes effective regulation impossible.
The Public Securities Litigation Reform Act of 1995 passed with sufficient bipartisan support to override President Clinton’s veto. The Act was designed to make it vastly more difficult for the victims of securities fraud to sue the fraudsters. It succeeded, which has made the financial sector more criminogenic because it makes it easier for the CEOs to loot with impunity. (The 1998 amendment to the PSLRA made it substantially more hostile to fraud victims. It passed with the support of Clinton, a majority of Democrats, and only one negative vote by a Republican.)
The Gramm-Leach-Bliley Act of 1999, which repealed the Glass-Steagall Act, passed with overwhelming support and the active sponsorship of the Clinton administration and the Congressional leadership of both parties. The Glass-Steagall Act was adopted because we investigated the causes of the Great Depression, principally through the Pecora investigation, and found that combining investment and commercial banking led to conflicts of interest that produced recurrent abuses and helped trigger the crisis. The Glass-Steagall Act worked brilliantly. America prospered, as did our commercial and investment banks. Recessions became far less common and far less severe.
In the late 1990s, Brooksley Born, the head of the Commodities Futures Trading Commission (CFTC), realized that credit default swaps (CDS) posed a potential severe danger and sought to review whether the CFTC should adopt regulation to respond to the danger. The Clinton administration, Alan Greenspan, and the congressional leadership of both parties rushed to adopt the Commodities Futures Modernization Act of 2000. The 2000 Act passed with overwhelming support and created a regulatory black hole that Enron exploited to cause the 2001 California energy crisis and AIG executives exploited to become wealthy and drive AIG insolvent.
We can now add to this list of bipartisan financial deregulatory disasters the JOBS Act of 2012. I have explained in prior articles that the Act is the product of a feeding frenzy by lobbyists who are finally able to enact every fraud-friendly provision they ever dreamed of making law. The only kind of financial bill that can pass with overwhelming support is an anti-regulatory bill. The Republicans and Democrats share two key characteristics. The finance industry is the leading political contributor to both parties and both parties’ views of finance are largely shaped by neoclassical economic views that are false, destructive, and so dogmatically held that they have remained immune to repeated falsification by reality.
Any overall discussion of our financial crises should be framed by this question: why do we suffer recurrent, intensifying crises. The question has two parts. First, what is causing our crises? Second, why do we learn the wrong lessons from prior crises? The embrace of the three “de’s” by both parties – deregulation, desupervision, and de facto decriminalization – has created ever more criminogenic environments that cause crises to become more severe. The epidemics of accounting control fraud generated by the three de’s drive the financial crises that lead to recessions. If the government exposes and sanctions the elite frauds that drive the crisis it can create (briefly) the political space for real reform legislation. If, however, the government fails to expose and hold accountable the elite frauds that political space for real reform will not be crated and any reform bills may be large, but they will not be fundamental. The finance industry will exploit any severe financial crisis and recession by arguing that it is essential to embrace the three de’s in order to spur a recovery. The finance industry makes different arguments when times are good. It argues then that the banks are so profitable and losses so low that it is perverse to prevent the banks from engaging in their total wish list of activities while reducing or eliminating any restrictions the banks fine onerous. The finance industry in the U.S. and the U.K claims that their nation must win the regulatory “race to the bottom” so that they can out-compete residents of the other financial center. In good times or bad finance has only one position – a more passionate embrace of the three de’s is vital.
We are living with a public policy for financial regulation that closely resembles a ratchet. With rare exceptions immediately following fraud epidemics that become scandals, regulatory policy only moves in one direction further loosening restrictions. The more crises these failed anti-regulatory policies create, the looser the regulations become and the more severe the crises become. We are destroying our economy and other nations, particularly in Europe, are following our lead with equally self-destructive results.
We have trashed a regulatory system that was the envy of the world. It helped bring us prosperity, far greater economic stability, fewer and less severe recessions, and reduced income inequality. It made freer enterprise possible because the regulatory cops on the beat helped limit the Gresham’s dynamic in which bad ethics drives good ethics out of the marketplace. When frauds prosper honest businesses are among the victims. The three de’s have brought us recurrent, intensifying financial crises, the end of any material gains by the middle class, losses for the working class, the expansion of poverty and extreme inequality, and the domination of our political system by crony capitalism. Elite fraud and corruption are now common in America.
Where is Bluto (John Belushi’s classic role in Animal House) when we need him? Whenever the parties get together in an anti-regulatory feeding frenzy they love to bust out the guitar and sing Kumbaya about how wonderful it is to achieve consensus. We need Bluto to grab the guitar and smash it into little pieces.
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Many thanks Yves and Black. Fantastic!
This is a great post and entirely true as far as it goes. Unfortunately, securities regulation, unlike bank regulation, was never much of a success. Its principal effect was discrimination in favor of those rich enough to afford representation from connected law firms whose every move was graciously accepted by the SEC at all levels, from junior staff to top commissioners, all of whom wanted nothing better than retirement to cushy sinecures in the mutual funds, corporations and law firms practicing their mutually self regarding con on investors large and small.
Reduction in white collar crime requires effective laws and inexpensive access to courts sympathetic to individual as opposed to corporate interests. I don’t think anybody knows how we can possibly get there from where we are. You need entirely different politicians, judges, lawyers from the ones who have succeeded by milking the existing system. The ones we have simply know no other way to behave, and it doesn’t matter whether they call themselves Democrats or Republicans.
When one talks about private market solutions it’s about bringing in six sigma quality control measures, better accounting controls and using a bidding process along the lines of what any private business would do, low price and good product. It was not supposed to be removing laws that make it a crime to bilk consumers and investors.
When we engage in the necessary discussion regarding big vs small government I would hope those on both sides of the topic are honest about what they are after.
“Six sigma quality control”. Didn’t GE tout that as one of the reasons they were so great before they had to be bailed out by the government in the fall of 2008?
«There is no more destructive regulatory mindset short of outright corruption than viewing the industry as your “client.”»
This is happening everywhere. The best tactic to achieve this is to make a regulatory agency self-funding with “client” fees being their only income.
One example is the Patent Office, which was setup to ensure that valuable state enforced monopolies were granted only for valuable disclosures, by rejecting low value patents; now that it is funded entirely by patent processing fees it seems to have adopted a quantity-over-quality approach.
«found that combining investment and commercial banking led to conflicts of interest that produced recurrent abuses and helped trigger the crisis.»
One of the great ironies of contemporary USA finance is that currently using commercial banking guarantees such as the the FDI scheme or access to Fed Board loans to support investment banking speculation and losses is actively encouraged by Treasury and Fed Board, in effect mandatory, instead of forbidden.
«The three de’s have brought us recurrent, intensifying financial crises, the end of any material gains by the middle class, losses for the working class, the expansion of poverty and extreme inequality, and the domination of our political system by crony capitalism. Elite fraud and corruption are now common in America.»
But they have always been common; the USA economy was founded on a surplus generated by natural resources plus the Yankee production system, and extensive fraud and corruption, as de Tocqueville reported in “Democracy in America”:
http://xroads.virginia.edu/~HYPER/DETOC/1_ch13.htm
«Consequently, in the United States the law favors those classes that elsewhere are most interested in evading it.
It may therefore be supposed that an offensive law of which the majority should not see the immediate utility would either not be enacted or not be obeyed.
In America there is no law against fraudulent bankruptcies, not because they are few, but because they are many. The dread of being prosecuted as a bankrupt is greater in the minds of the majority than the fear of being ruined by the bankruptcy of others; and a sort of guilty tolerance is extended by the public conscience to an offense which everyone condemns in his individual capacity.»
On the difficulties of regulation Galbraith wrote in “The great crash 1929”:
«When prices stopped rising — when the supply of people who were buying for an increase was exhausted — then ownership on margin would become meaningless and everyone would want to sell. The market wouldn’t level out; it would fall precipitately.
All this being so, the position of the people who had at least nominal responsibility for what was going on was a complex one. One of the oldest puzzles of politics is who is to regulate the regulators.»
where ultimaltely the regulators are Congress, and that should be the voters.
«Reduction in white collar crime requires effective laws and inexpensive access to courts sympathetic to individual as opposed to corporate interests. I don’t think anybody knows how we can possibly get there from where we are. You need entirely different politicians, judges, lawyers from the ones who have succeeded by milking the existing system.»
That the usual delusional moralizing, because it requires entirely different voters. The «politicians, judges, lawyers» who been doing the milking have been enabled by the gullible greed of voters who are enthusiastic about fraud and crime if they get a cut in the form of massive repeated tax free capital gains.
As one of the ancient wise people said, the price of freedom is eternal vigilance, and if the citizens can’t spare the effort to be vigilant, or are actively suppressing vigilance, the public interest gets warped.
The great political success of the crony capitalists in the USA has not been the corruption of «politicians, judges, lawyers» and the regulatory system, as Black and you naively write, it has been the corruption of voters (especially middle aged middle class ones, and especially propertied female oned), which have been convinced that they are or are going to be part of the kleptocratic elites, and f*ck everybody else.
The best con jobs are those in which the marks think they are going to get a cut of a bigger con in which they are complicit; and USA voters have been voting massively and enthusistically for 30 years to throw the hammer at jimini crickets like Black, because they have been persuaded that if they enable and support white collar fraud they are going to get a cut of the loot.
In trhe secret of the ballot box USA voters can be as pig headed and mean as they wish, and the vast majority of the politicians who have voted for the PATRIOT and TARP bills, and many other bills of goods like that, have been re-elected resoundingly. Because they are popular.
Some of my usual quotes… The first from the great historian Gingrich:
http://classwebs.SPEA.Indiana.edu/bakerr/v600/a_new_look_at_environmental_poli.htm>
«If you have a society where almost every middle class person routinely fudges the law, that’s telling us something. We have laws that matter – murder, rape, and we have laws that don’t matter. Speed limits are an example. Why would you think that a regulatory, process-oriented bureaucratic model would work?
The first thing that every good American says each morning is “What’s the angle?” “How can I get around it?” “What does my lawyer think?” “There must be a loophole!” Then he proceeds to work the angle, and the bureaucracy spends its time chasing that and writing new regs to stop him. America is the most incentive-driven society on the planet.»
The one from the always realistic Norquist:
http://www.prospect.org/web/page.ww?section=root&name=ViewWeb&articleId=11699
«The 1930s rhetoric was bash business — only a handful of bankers thought that meant them.
Now if you say we’re going to smash the big corporations, 60-plus percent of voters say “That’s my retirement you’re messing with. I don’t appreciate that”.
And the Democrats have spent 50 years explaining that Republicans will pollute the earth and kill baby seals to get market caps higher.
And in 2002, voters said, “We’re sorry about the seals and everything but we really got to get the stock market up.»
Then some from Galbraith’s “The great crash 1929”:
«One thing in the twenties should have been visible even to Coolidge. It concerned the American people of whose character he had spoken so well.
Along with the sterling qualities he praised, there also displaying an inordinate desire to get rich quickly with a minimum of physical effort.»
«The Florida boom was the first indication of the mood of the twenties and the conviction that God has intended the American middle class to be rich. [ … ] Even as the Florida boom collapsed, the faith of Americans in quick, effortless enrichment in the stock market was becoming every day more evident»
«Yet, in some respects, the chances for a recurrence of a speculative orgy are rather good. No one can doubt that the American people remain susceptible to the speculative mood — to the conviction that enterprise can be attended by unlimited rewards, which they, individually, were meant to share.»
Man, that’s really a telling quote speaking to Gingrich’s values and the world he lives in, isn’t it? Anybody know anyone personally like that? Who actually wakes up in the morning thinking about how to weasel around the laws for their own personal advantage? I guess it also helps explain why most of us aren’t part of the ‘elite’.
«Who actually wakes up in the morning thinking about how to weasel around the laws for their own personal advantage?»
Businessmen, executives, bureaucrats? Careerists on the make? Salesmen? Brokers? Financial analysts? Taxpayers who hire tax consultants? Shop owners? The self employed? Suppliers of weed for medical purposes? Those who tip garbage in the wrong place to avoid paying for garbage disposal?
The other quotes I provided say much the same — so many Usians just want to take shortcuts, because winners do whatever it takes.
I would say that your comment betrays some lack of business experience, because commercial dealings usually put you rapidly in touch with lots of people like Gingrich describes.
For context here is another bit from the same speech by Gingrich:
«In Germany on the Autobahn there is no speed limit. If tomorrow the Bundestag adopted a 100km, or 62-mph speed limit, virtually every German would obey it. Until, that is, the next election when they would wipe out the current politicians and they would elect the “No Speed-Limit” Party.
Now this is a significant insight that American reformers have neglected for 30 years, and is the great mistake of the Great Society and everything that followed it.
And I don’t want to offend anybody, but let me suggest to you that the American cultural response to the challenge of speed limits has been dramatically different than the German one. For most Americans speed limit is a benchmark of opportunity. This is not a light insight.»
As to recent events in the financial markets and those of 80 years ago (never mind those of 20 years that Black is so hurtingly familiar with), another quote from Galbraith:
«The fact was that American enterprise in the twenties had opened its hospitable arms to an exceptional number of promoters, grafters, swindlers, impostors and frauds. This, in the long history of such activities, was a kind of flood tide of corporate larceny.»
There can be several reactions to the realization that the USA has been and continues to be a “low trust” culture (except perhaps remote areas in the Yankee heartland or the North) where “hustling” is admired and pursued by many.
One is to imagine that this is not true, and that Usians are upright citizens with a few bad apples among them, and then one has to conclude that only the few bad apples vote.
Another is to say that’s how things are and you can’t do anything about it and social Darwinism should be left to do its job to reward the quick and punish the slow.
I would prefer for some ways to be found to help slowly change the culture from one where “F*ck YOU! I got mine” is the main goal of so many, to one where most people understand that guarded cooperation makes everybody better off at lower risk, which is what the Germans have learned.
But one thing that struck me in some old article reporting polls on Usian attitudes is that 60% of young Usians in the poll reported that they expected to retire into the top 1% by wealth if not income. One way or another, because winners do whatever it takes :-).
One wonders if De Tocqueville would have observed a different culture in the 1930s. When surrounded by opulence and excess, Americans in the 20s were optimistic, risk takers. Rather than feeling uncomfortable with unearned income, they reveled in it. Those morally reluctant to join the fray were beset by jealousy. Many succumbed. But just a few years later the global economy entered the Great Depression, then the war. Reportedly, Americans were quite cooperative at that time. Perhaps the cultural venality you describe will be changed during this depression.
Great the we are all participants in our own demise argument, artificers in our own damnation. Sure a bunch of idiots built the pyramids for some godhead maniac for beer/bread/faith/etc some 5,000+ years ago and it has gone on and on. We can cite examples of this ad absurdem throughout history, where we have bought into the collective madness. Sure everyone is hard wired to take advantage of the system if they are given the opportunity. That women managers also replicate the pay inequalities between women and men in their own staff. That accumulations of power are self-reinforcing, regulatory capture is abundant, and we are all participants in this because it feeds our vices for shiny trinkets.
That is not the point. People with all of those things in consideration have attempted to construct checks and balances, regulatory frameworks, and safety nets to stabilize the system a bit and create a sense of mutual predictability of behavior amongst agents. They don’t work perfectly, people still cheat, your wife still pressures you to hire her idiot brother, or you get your moronic son into positions of power until he becomes president, that shit happens. But, they manage to keep the system stable to a degree, more likely within a stable oscillation pattern. The breakdown or capture of these types of systems is also inevitable but we are supposed to use their lessons in order patch it up a bit.
Problematically there are sophisticated groups of individuals, PR firms, corporations, lobbyists that have framed the public’s understanding of these past events and breakdown of these systems in a manner that is not fruitful to their resolution. That, as much as our love for trinkets and propensity for self deception, is also part of the problem. As much as you want to say it is human nature, neither you nor I want to live within societies that have no mutual predictability of behavior because it would be Somalia, and your Newt Gingrich citation skills would be no match for the other guy’s AK-47 in that type of environment.
So to F with that argument because it is useless. Big deal, people are imperfect. It is the systems that we set up that dampen those imperfections and inspire our better spirits. In the early 1900s most of the USA was a backwater. A damn third world country where people shit in outhouses, didn’t have electricity, and perpetually had sanitation related diseases. Now everyone wants to deregulate us back to that.
Brilliant post. I volunteer my time serving as what used to be known as a “judge pro tempore” in a small claims court (the “real” judges have little interest in the squabbles of the teeming masses). I can affirm that Mr. Gingrich and Mr. Norquist are quite correct about the corruption of the ordinary American, and his and her blithe willingness to lie, violate contracts and act in naked bad faith. The American voter has EXACTLY the system that he or she wants, but like most marks in a truly big con, think that someone else is the mark.
Where do we get this “blame the voter” crap? Voters are the ultimate target of all the corruption. Give voters meaningless choices, make it hard to form real political parties, set onerous requirements to qualify for voting, place voting locations in obscure locations, pick unknown days for polling, on and on and on. Every trick you can think of, and that’s before we consider slimy, evasive candidates who mumble out all sides of their mouths.
Next Tuesday I have to go vote for a Republican to be nominated. I am so very angry I want to smash the voting machine but what good would that do?
Back 40 years ago there was a “blame the victim” meme in sociology. It was exposed as false.
«Give voters meaningless choices, make it hard to form real political parties, set onerous requirements to qualify for voting, place voting locations in obscure locations, pick unknown days for polling, on and on and on.»
In the USA the unwilling victims are the non-voters, the 50% who don’t participate, either because the “machines” or the Republicans don’t want for the wrong people to participate, or because they are too poor and/or depressed to vote.
But in the USA money talks: if voting is not easy, use donations. Candidates gets elected by votes, but nominated by donations, and they listen very carefully to what their nominating donors say.
Unfortunately in the USA only 5% of potential electors donate, the welathiest 5% as a rule, and effectively the remaining 95% hand over the crucial power of nomination to the 5%.
Then 50% who vote and the 5% who donate, which are the better off 50% and the even better off 5%, usually are quite happy with non-participation by the worse off 50% and 95%, and love incumbents who promise to give them a cut of the loot.
I say give the so-called “libertarians” what they claim they want – a true free market. We should start by abolishing the government backed/enforced money monopoly for private debts – the banking cartel.
Once again, great post.
You can never get rid of business cycles and the swings from good times to bad times: these happen as the result of business decisions that can be best expressed as the swine cycle. To see what I mean by that, google that term or read this:
http://21stcenturyschizoidman.blogspot.de/2010/06/swine-cycle-reappears.html
A good banker, back in the day, is someone who could recognize when the cycle was starting to turn downwards and was able to help his customers – quelle horreur – manage their slowdowns without going broke. It used to be the job of good managers to be prepared for when their business cycle turned downwards in order to keep their core staff and manage poor revenues until the cycle turned upwards.
Sigh. Those were the days.
Now, legislation seems to be set up to be pro-cyclical and aimed at enabling those poised to go short – or long – to do so massively over a very short period of time, making their hundreds of millions very quickly, without regard to what that matters for the rest of the economy.
Set up this way, you will have only periods of excessive booms and busts, where volatility is king and the only people really making money are those who thrive during busts. I think the nomenclature in vampire squid, but we all know today that the system has long become subservient to the parasites living off the system and exists at their whims because that is the way that the parasites have set up the system to be.
They have no problem in destroying everything if, beforehand, they can skim off a few billion. Gives the rest of capitalism a bad name…
You can never get rid of business cycles and the swings from good times to bad times: John F. Opie
The business cycle is a consequence of money that is lent into existence – the loans create the boom and repayment creates the bust.
The solution is money that is spent into existence. Then we could expect steady growth much as we get steady power from a turbine instead of the boom-bust cycle of reciprocating engines.
«Now, legislation seems to be set up to be pro-cyclical»
I have been reading the awesome book by Michael Pettis “The volatility machine” where he shows very clearly that “mistankenly” the financial structure of many countries (developing countries in his book) is very pro-cyclical.
When he comes to ways to make it anti-cyclical he never quite gets to the point of realizing that lots of important interest groups, and not just in developing countries, have compensation proportional to beta (volatility) and not alpha (absolute returns) and thus benefit by pro-cyclical policies, and support them by all means.
The whole financial sector is in particular rewarded on beta, but not only.
«and aimed at enabling those poised to go short – or long – to do so massively over a very short period of time, making their hundreds of millions very quickly»
Unfortunately many if not most voters think that they belong to that group, and that pro-cyclical policies are fabulous if they give them bigger tax-free house or stocks capital gains.
Collectively Usian “F*ck YOU! I got mine” voters have given up their birthright (unions, middle class wages, long term jobs) for a mess of short term tax-free capital gains, thinking that those poorer than themselves would be the marks and pay the price.
Texas and CA thrifts? Well they’re large states. The first thrifts to fail were state-chartered ones in MD and OH.
“The word bipartisan means some larger-than-usual deception is being carried out” — George Carlin
“The S&L frauds in Texas had exceptional political power. ”
I bet. Think big when promoting banking fraud. Use Texas as seat of conspiracy. Claim it’s New Yorkers who did it.
“.. the product of a feeding frenzy by lobbyists who are finally able to enact every fraud-friendly provision they ever dreamed of making law. ”
Like these rollback efforts ?,
http://www.businessweek.com/news/2012-03-26/u-dot-s-dot-house-backs-exemptions-to-swaps-rules-in-bipartisan-vote
after reading the above
i note they are re-releasing an anniversary edition of the classic I, Claudius this week on dvd
and i am reminded why the series was such a hit
and continues to be relevant
what is particularly crazy is that both the UK and US financial “industry” are basically filled with branches of the same multi-national corporations. End result is that they are playing on nationalism and customer withdrawal to essentially have the two one up each other in hole digging.
«the UK and US financial “industry” are basically filled with branches of the same multi-national corporations»
That’s a good observation, but it is all just theater, a Punch-and-Judy show, about making excuses, and the politicians in both countries are totally in on the joke.
They know very well what they are doing, and that a prudentially regulated market deters shysters and attracts investors, because investors are afraid of “markets for lemons”.
But the goal is precisely to attract shysters and deter investors, because the industry, both in NYC and London, makes money on churn and letting shysters fleece the public, or more precisely the pension and savings funds of the public.
In the UK there are now some factions within the elite that have some strong reservations about the current arrangements, because the shysters in the City were supposed to only fleece foreigners, and it was a suprise to some that they needed colossal amounts of public money to continue to exist, having distributed their capital to their management by under-reserving against the colossal risks they were taking.
But the dominant elite factions are still entirely complicit with the shysters, as the shameless article on the City in the Economist, previously discussed in this column, shows. But that some shameless advocacy was published shows that the other factions are at least making some noise that needs countering.
There is the legend that, after the shysters who worked at Lloyds as brokers screwed their public-schools mates who had invested in Lloyds as names, the chairman of Lloyds commented “if God made them sheep it was for them to be sheared”.
That’s probably TBTF USA and UK financial institutions gettings trillions of freshly made money from the government have been thinking all the time.
What will happen when we get rid of all regulations? If there are no rules at all, how will business be conducted? Contracts will be meaningless. Property will be meaningless. Money will be useless. Cooperation will cease. Competition will devolve into conflict, violence, a war of all against all. World War? Will we finally get to Hobbes vision of our primitive state?
How will it all work when there are no rules whatsoever?
What’s it like to play a game with absolutely no rules?
Who says there’s no rules?
There’s always the One Rule: Pay The Man.
http://littlebobeep.com/wp-content/uploads/2010/05/Calvinball1.gif
Thanks for the awesome CalvinBall cartoon link, both in itself and as a metaphor for finance.
«In the late 1990s, Brooksley Born, the head of the Commodities Futures Trading Commission (CFTC), realized that credit default swaps (CDS) posed a potential severe danger and sought to review whether the CFTC should adopt regulation to respond to the danger.»
The debate over that is beautifully saved for posterity in the back issues of Derivatives Strategy, and for example in this extremely enlightening page:
http://www.derivativesstrategy.com/magazine/archive/1997/0597rtbl.asp
which was mentioned by a very good anonymous commenter:
http://www.nakedcapitalism.com/2009/03/wolfgang-munchau-abandon-all-hope.html#comment-40014
http://www.nakedcapitalism.com/2009/03/wolfgang-munchau-abandon-all-hope.html#comment-40018
and from which I quoted some very revealing passages in the same comment stream. Given that another commenter has mentioned:
«what is particularly crazy is that both the UK and US financial “industry” are basically filled with branches of the same multi-national corporations»
I shall requote here one of the more apposite comments on the proposed deregulation of derivatives trading:
«John V. Rainbolt
Chairman, International Issues Subcommittee of the American Bar Association’s Committee on Futures and Derivatives Regulation
[ … ]
Avoid the British experience. As the professional market legislation also proposes, U.K. regulators concentrated on the politically correct goal of protecting small punters, leaving professionals to their own devices.
Knowing the relevant history, a U.S. politician worth his or her salt should wonder if the Conservative government’s approach to market oversight has something to do with the number of Tory resumes on the street, and if a vote to duplicate U.K. market regulation communicates this disease, brought on by a rapid succession of Barings, Morgan Grenfell and Sumitomo problems, to name a few.
British regulation, now recovering and making adjustments, failed not only to protect the public from the industry, but the industry from itself. Not a good idea in the United States.»
As the good one say, nobody is considered a prophet in his own country :-).
A Banking Cartel perspective, hosted by a banking lawyer blogger who can’t stand Bill Black:
http://www.banklawyersblog.com/3_bank_lawyers/2012/03/heavy-handed-regulation-impeding-progress.html
“The finance industry is the leading political contributor to both parties and both parties’ views of finance are largely shaped by neoclassical economic views that are false, destructive, and so dogmatically held that they have remained immune to repeated falsification by reality.”
If we are to restore sanity to financial regulation, we will first have to restore sanity to our political processes. There will always be pressure to avoid killing the golden goose of finance but this goose is in danger of becoming pate because a few of those golden eggs keep ending up in the pockets of our politicians.
If there be Karma, Mr. Black, upon arrival at the pearly gates you would be greeted by Bluto and handed a guitar.
«There will always be pressure to avoid killing the golden goose of finance»
Which golden goose? For whom? Because the part of finance known as banks as a rule over the cycle make losses and destroy part of their own capital, and insurance is not much better.
Sure on the up part of the cycle banks and finance in general distribute a lot of money to a very few connected insiders, but on the down part of the cycle the losses usually exceed that, often by very much.
Governments have had to recapitalize banks and other bits of finance periodically, because they are usually loss-making overall.
Finance is a bit like the airlines: they don’t make money overall, but they are convenient to have, despite that. Surely neither is a golden goose, again except for insiders.
Both are actually heavily subsidized by governments because they ultimately carry out state policy (airlines are in effect the Air Force reserve, finance are in effect Treasury’s long arm). Same as for Big Oil, but at least Big Oil makes money (even if still extractively, that is still by running down capital).
Hey I so liked reading your blog. I’m considering beginning my own blog soon Cheers.
Awesome learned something newjust now now I’m set for today. Cheers!
STRUCTURED INVESTMENTS: IT’S TIME TO PROTEST FOR REAL!
Here we are in 2012 and Wall Street’s “structured investments’’ are still out of control.
At a time when political candidates talk about the need for jobs and investment, Wall Street continues to focus on ensuring that its high-stakes poker games go unregulated.
The SEC defines structured investments under Rule 434 as: “Securities whose cash flow characteristics depend upon one or more indices or that have embedded forwards or options or securities where an investor’s investment return and the issuer’s payment obligations are contingent on, or highly sensitive to, changes in the value of underlying assets, indices, interest rates of cash flows.”
No wonder structured investments are hard to control – nobody really understands them. But that didn’t stop people like MF Global’s Jon Corzine, Lehman’s Dick Fuld, and does not other Wall Streeters from manufacturing these investment “products” to produce revenue for their firms. Do product liability laws apply to these products?
Jefferson, in a letter to Albert Gallatin, Treasury Secretary in 1802, said: “I believe that banking institutions are more dangerous to our liberties than standing armies.”
Everyone should know something about what has happened to our economy and society stemming from all the too complex to explain exponentially leveraged “securities.” And the greed behind all the structuring is still going on without meaningful restraint as we enter a new year. At least Occupy Wall Street is persistently protesting in the shadows of the Wall Street glitzy office buildings.
Protest is the only way to change the essential inhumanity of so much greed. Plutarch said: “An imbalance between rich and poor is the oldest and most common ailment of all Republics.”
Occupy Wall Street has led the way to a new awareness of the feelings of betrayal and being left out of the American Dream caused by the drive to grow net worth by the few against the best interests of the many. Financial products such as structured investments do not lead to capital formation that is required to create jobs.
And in 2012 there is a need to have the right conversation about the right to produce structured investments that may have $600,000,000,000 of leveraged derivatives, which defy rational explanations, just waiting for a new hiccup to explode – or is it implode?
Wall Street was instrumental in the development of our country. Wall Street raised the capital for industrialists to invest in plant and equipment and innovative ideas which created the strongest economy of all time. It helped produce the middle class and could help to resurrect it if it had the will. Why could Wall Street not put risk capital into American manufacturing rather than geometrically leveraged virtual value? Why not stop all the leverage, which generates huge fees in the short run, but puts our entire economy on the line? Why can’t Wall Street take the lead and make money the old fashioned way – not at the expense of the people but to rebuild the lives of the 99 percent.
How can the Republican debaters’ and the media wonder how to rebuild trust? Trust in what – in a government that has failed to protect the public? Trust in banks that only care about structuring investments – so complex that the SEC definition is so arcane that only a few know what in the hell it could possibly mean?
Samuel Adams said: “It does not take a majority to prevail…but rather a tireless minority keen on setting brushfires of freedom in the minds of men.”
The Tea Party is an example of setting brush fires. However, its mission is to keep brush fires burning to obstruct passing the budget, or to avoid passing Obama’s jobs bill, or to get rid of health insurance for Americans who did not have access. These brush fires have been set to interfere with the freedom to care about the common good and our Government’s obligation to protect it.
Occupy Wall Street is a minority too. But its ethic is a function of restoring equality and fairness to the American Dream. We cannot allow unbridled, unfettered greed to permit the creation of “structured’’ financial products without investing in jobs or in capital formation. OWS certainly does not mean freedom for Congress to continue to be: of the lobbyists, for the ultra rich and by the ultra rich – who are the generals of the Mega Banks and the Corporations that ship jobs and profits off shore.
Jefferson noted: “The legitimate powers of government extend only to such acts as are injurious to others.” This was before germs, or automatic weapons, or nuclear bombs, or planes or the internet, or capitalism or 350 million Americans living on a globe with billions of people, connected to each other by laptops and facebook – and Huffington. So we need to view Jefferson’s profound concern for the public good in terms of today. We did manage to create the American Dream, but the deregulation of greed and the devaluation of ethics has become injurious to the 99 percent.
So now we have a new year, and a new election. And it is time to focus on the needs of the 99 percent and tear down party lines and obstructionist tactics. The truth is simple: It is time for all Americans to come together to understand that all the Greed and self interest is wrong. We need to fix it.
Congress along with Wall Street can step up to the line to do what is right for the people if there is a willingness to understand the reasons behind the brush fires, and go back to the basics that made our country great.
Henry Schoenberger is the author of the new book – How We Got Swindled by Wall Street Godfathers, Greed & financial Darwinism ~ The 30-Year War Against the American Dream, with a foreword by David Satterfield, former business editor of the Miami Herald and 2 times Pulitzer Prize-winner.
The following is a synsopis and the endorsements from the back cover of How We Got Swindled:
Swindled is a political, socio-economic, financial, and philosophical treatise on the state of our dysfunctional society. It is a brutally candid expose of political self-interest and economic self-interest. And how our democracy, founded on the primary principle “of the people, by the people and for the people” (Lincoln’s Gettysburg Address) has become a political system of the lobbyists, by the ultra rich and for the ultra rich and their special interests.
“With keen intellect and searing wit, Henry Schoenberger’s How We Got Swindled exposes the myriad of financial hijinks and colossal leadership failures that have turned the first decade of the new century into an economic disaster. Schoenberger not only identifies the causes, rationales and human failings that led to this mess; he provides some ready answers for how we must go about fixing it. This should be must-reading for every policy maker in Washington and every student of economics and finance.”
– David Satterfield, former Business Editor of the Miami Herald, 2 times Pulitzer Prize Winner
“Having been on the inside of one of the largest sub-prime mortgage lenders that failed, I can attest to the fact that Mr. Schoenberger has got it right. His insights and historical perspectives are on the money. We need to be focusing on how we effectively regulate the markets so that this type of crisis does not come back to bite us again.”
— Marc Loewenthal, Esq. Former SVP of Enterprise Risk Management, New Century Financial Corporation