Category Archives: Banana republic

Hair of the Dog that Bit Us: Capital Requirements Provide Ethical Cover for Abuse of the Safety Net

By Edward Kane, Professor of Finance at Boston College and founding member of the hadow Financial Regulatory Committee

“We are a moving company not a storage company”
…Apocryphal Bear Stearns executive

Regulators define a financial institution’s capital as the difference between the value of its asset and liability positions. The idea that capital requirements can serve as a stabilization tool is based on the presumption that, other things equal, the strength of an institution’s hold on economic solvency can be proxied by the size of its capital position. That in turn assumes you can rely on those figures.

Will Cyprus Become Creditanstalt 2.0?

The cheery view that Europe had moves past its crisis now looks to have been a tad premature.

Cyprus: The Next Blunder

Yves here. Our post today on Cyprus provides some broad background, including the political dynamics and the not-terribly-defensible reasons the Eurozone went that route, and a short discussion of the large risk that this inept move precipitates a wider crisis. This article by Charles Wyplosz serves as a companion, since it discusses the “tax,” um, expropriation option versus other alternatives. Even more important, it sketches out why this scheme, even if it manages not to kick off a crisis, is still inadequate to rescue Cyprus. It is thus a toxic variant of the Eurozone “kick the can down the road” strategy.

James Steele: America’s Point Man in Fomenting Sectarian Violence and Torture in Iraq

The Guardian has released a documentary on American operative in Iraq, James Steele, which appeared on BBC. From the related news story in the Guardian:

The Pentagon sent a US veteran of the “dirty wars” in Central America to oversee sectarian police commando units in Iraq that set up secret detention and torture centres to get information from insurgents. These units conducted some of the worst acts of torture during the US occupation and accelerated the country’s descent into full-scale civil war.

Jeff Madrick: CBO’s Lack of Independence Means We Need a Shadow CBO

Yves here. The Congressional Budget Office is widely depicted in the media as “nonpartisan” and therefore above reproach. It’s time to treat that view as outdated. Like the Fed, the CBO continues to profess its independence but is in fact an aggressive promoter of neoliberal policies. We discussed at some length how Fed economists savaged its health care cost model, which is the driver of budget hysteria.

Jeff Madrick describes even more problems with CBO forecasts, and how they have become so significant that the public needs a shadow CBO to challenge the often-flawed official projections.

Live Blogging JP Morgan Senate Hearing – a Rogue Institution on the Hot Seat

Yves here. I wasn’t planning on liveblogging this hearing, but listing to the introductory remarks, the knives are really out for JPM. In all the post-crisis hearings I’ve watched, I’ve never seen such unanimity between the Democrats and the Republicans on the severity of the problem and the need for more regulation.

Senate “Whale” Report Reveals JP Morgan as a Lying, Scheming Rogue Trader (Quelle Surprise!)

There is so much grist in the just-released Senate Permanent Subcommittee report on the JP Morgan London Whale trades that the initial reports are merely high level summaries, which is understandable. Even with the admirable job done by the committee in documenting its findings and recommendations, it will take some doing to pull out the critical observations and convey them to the public. Plus the hearings tomorrow should provide good theater and further hooks for commentary.

But some critical findings emerge, quickly. We here at NC were particularly harsh critics of JP Morgan’s conduct, and disappointed in the media’s failure to understand that the information JP Morgan presented as it bobbed and weaved showed glaring deficiencies in risk controls. Yet the failings described in the report are even worse than we imagined.

David Dayen: Out of Control – New Report Exposes JPMorgan Chase as Mostly a Criminal Enterprise

There’s been an unlikely yet welcome resurgence of chatter about breaking up the nation’s largest and most powerful banks. Bloomberg’s story quantifying the too big to fail subsidy grabbed some eyeballs (and there’s an upcoming GAO report on the subsidy that will do the same). Sherrod Brown announced an unlikely pairing with David Vitter working on legislation on the subject. Dallas Fed President Richard Fisher is going to give a big speech on Friday on breaking up the banks… at CPAC, the largest conservative political conference of the year.

Bill Black: Which Aspect of the FDIC’s Litigation Failures is the Most Embarrassing and Damaging?

By 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. Jointly posted with New Economic Perspectives

Dave here (always wanted to say that!): I know Yves wrote about this yesterday, but it’s always worth getting Bill Black’s reaction on these regulatory matters – not to mention to further illustrate and amplify the FDIC’s conduct.

On March 11, 2013 the Los Angeles Times published a revealing article by E. Scott Reckard entitled: “In major policy shift, scores of FDIC settlements go unannounced.”

The article’s summary statement captures the theme nicely. “Since the mortgage meltdown, the FDIC has opted to settle cases while helping banks avoid bad press, rather than trumpeting punitive actions as a deterrent to others.”

FDIC Hides “Scores” of Bank Settlements Since 2007

The FDIC has been doing banks a big favor by agreeing not to publish the fact that they’d engaged in sufficiently wayward behavior for the agency to threaten regulatory action and negotiate a settlement. The Los Angeles Times unearthed this practice via a Freedom of Information Act request:

Did Intrade Do an MF Global?

By Rajiv Sethi, Professor of Economics, Barnard College, Columbia University. Cross posted from his blog

Treasury and Fed Officials Prevaricate Before Elizabeth Warren About Whether They Will Ever Get Tough With Banks

It’s a good thing Elizabeth Warren seems to regard contending with uncooperative, evasive and obviously misleading witnesses as a form of sport. I’d want to punch them.

Even American Banker is Savaging the OCC’s Mortgage Settlement

It’s clear the OCC is winging details it should have nailed down before settling.

Whistleblower: Wells Fargo Fabricated and Altered Mortgage Documents on a Mass Basis

Over the last two and a half years, Wells Fargo, like most of the major mortgage servicers, claimed that it had a “rigorous system” to insure that mortgage documents were accurate and complete. The reason this mattered was that there was significant evidence to the contrary. Foreclosure defense attorneys found repeatedly that, for securitized mortgages, the servicer or foreclosure mill attorney would present documents to the court that failed to show the borrower’s note (a promissory note) had been transferred properly to the trust. This mattered not only on a borrower level, but indicated that originators of the mortgage securitizations hadn’t bothered transferring the notes properly to the trusts that were to hold them. This raised the ugly specter of what was called “securitization fail,” that investors had been sold securities that they had been told were mortgage backed when they might in practice not be.

The robosiging scandal was merely the tip of the iceberg of mortgage and foreclosure problems that resulted from the failure to adhere to the requirements of well-settled state real estate law. The banks maintained that there was nothing wrong with mortgage ownership or with the records. All they had were occasional errors and some unfortunate corners-cutting with affidavits. If they merely re-executed all those robosigned documents, all would be well.

Wells Fargo’s own actions say the reverse.

As Dow Sprints to New High, the Middle Class and Manufacturing Languish

It’s hard to fathom the celebratory mood in the US markets, save that the moneyed classes are benefitting from a wall of liquidity reminiscent of early 2007, when risk spreads across virtually all types of lending shrank to scarily low levels. Then the culprit was not well understood, although Gillian Tett discerned that CDOs were a huge source of leverage, and in April 2007, an analyst, Henry Maxey at Ruffler, LLC, did an impressive job of piecing together how levered structured credit strategies were driving market liquidity.

Now it’s a lot easier to see what is afoot.