Category Archives: Regulations and regulators

Why Greenberg May Win the AIG Bailout Trial

Due to the hour, and the fact that I want to work up the argument longer-form over a series of posts, I’ll give only an overview now as to why the popular handicapping on the AIG bailout trial, that the suit is ridiculous and not worthy of attention, is wrong.

While this case by any logic should be ridiculous, the Fed so egregiously overstepped its authority in the way it handled AIG (and for that matter, its other bailouts) that they handed Greenberg a decent legal argument. And to add to the government’s self-inflicted woes, all of its bailout cheerleading also plays straight into Greenberg’s hands.

Probably the biggest relief to the government so far is that the media has virtually ignored the trial. The only major news organization that has a reporter there daily is Bloomberg. Their reporter, Andrew Zajac, concurs with our view (and quoted us) that David Boies, the Greenberg attorney, has decent odds of winning the case. If Boies does prevail, you can expect an Administration-led firestorm of outrage, with the arguments previewed in a Steve Rattner op-ed in the New York Times.

But the grandstanding serves to obscure the legal argument, which when you get past the technicalities, has real significance politically. That is why the officialdom would rather distract the public by hammering on “That ungrateful deadbeat Greenberg. Who is he to want more money when by all rights he should have been wiped out?” If anyone bothered to look at what is really at stake here, it is that the Fed, with the help of the Paulson Treasury, greatly abused its powers. And that matters because as a practical matter, the Fed is unaccountable for its actions.

More Private Equity Fibbing: Marketing Materials Often Exaggerate Returns

I’m a little slow to write this up because private equity abuses are so pervasive as to fall in the “dog bites man” category. But that doesn’t mean that the public at large, or worse, intellectually captured, credulous investors understand that.

One of the latest abuses to come to light is private equity firms effectively lying about their returns in past funds when dialing for dollars for prospective funds. The overview from Reuters, which broke the story last week:

JP Morgan Under Criminal Investigation for Foreign Exchange Trading Abuses

Regulators look to be getting more serious about financial firm misconduct, as witness their new-found willingness to file criminal charges against banks. Not that has happened yet as regards JP Morgan, the US bank with far and away the biggest rap sheet of all US financial firms. But as we’ll discuss, while it is good to see regulators getting tougher with banks, this move still falls in the category of “too little, too late,” particularly since it looks to a last-ditch effort to improve departing attorney general Eric Holder’s file of media clips.

Here is an overview of the JP Morgan investigation from the Wall Street Journal:

Prosecutors Reopening Cases Against Bank Recidivists; Change or “Change You Can Believe in”?

The New York Times yesterday published a new story by Ben Protess and Jessica Silver-Greenberg on how Federal prosecutors are investigating reopening cases against big banks and hitting them with additional charges. Reader Richard D, who was curious about the story, wrote, “It is hard for me to know whether this is a momentous event, or a nothingburger.”

It’s actually somewhere in the middle. While it represents prosecutors starting to use muscles that had atrophied, at least as far as financial firms are concerned, as readers will no doubt suspect, the shift falls well short of the levels of official zeal needed.

But there’s actually an important shift discussed at some length in the article that may have bigger ramifications: that powerful bank consultants and lawyers are no longer being taken at their word.

Wolf Richter: The Wrath of Draghi – First German Bank Hits Savers with Negative Interest Rate

Draghi’s near zero rates have resulted in banks that don’t engage in casino banking to start imposing negative interest rates on savers. The case described in the post is likely to lead other banks to follow suit if there isn’t a big backlash.

Germany Turning Sour on the Transatlantic Trade and Investment Partnership

Yves here. The US media has given considerably more attention to the TransPacific Partnership, the western sister of an ugly multinational-enrichment-scheme-billed-as-a-trade-deal called the Transatlantic Trade and Investment Partnership. The comparative silence about the US-European deal has led many observers to assume that it is more or less on track.

Maybe not.

ECB Stress Tests: The View of an Insider

Yves here. The ECB stress tests are starting to resemble the process that Japan’s Ministry of Finance used in dealing with zombie banks in its post-bubble years. The MOF would gradually acknowledge how bad the loan books were as the banks were able to make writeoffs (not that anyone was really fooled; foreign analysts were regularly making their own assessments). So the exercise is to pretend that the amount of disease revealed is credible, when those in the know recognize full well that is it much worse.

Private Equity Consultants Flounder Over Question About Abusive “Evergreen Fees” at CalPERS Board Meeting

If you want to understand why private equity general partners have gotten away for so long with what the SEC has come perilously close to calling outright embezzlement, along with other serious compliance abuses, you need look no further than the last CalPERS board meeting to get a clue.

SEC Commissioner Kara Stein Fighting for Tougher Bank Sanctions, Stymies Bank of America Settlement

One of the things that continue to be a source of anger in the American public is the way that banks were rescued en masse without the perps, the managers and producers in the businesses that produced toxic product facing much if anything in the way of consequences. Another is that the banks pay fines that are inadequate relative to the amount of damage that they did.

SEC commissioner Kara Stein has been using her post as a surprisingly effective bully pulpit to pressure the agency and other regulators into upping their game. It’s unusual for an SEC commissioner to play that role; the post is typically a runway for becoming either a lobbyist or a director on financial services company boards. Even more rare is that Stein is regularly crossing swords with SEC chairman Mary Jo White, who is taking a much more industry-friendly line than she promised at the time of her confirmation. It’s virtually never done to have a commissioner from the same party buck the chairman.

Tech Underbelly: Indentured Servitude and Bonded Labor in the US

A labor collusion pact with the aim of suppressing pay levels among Apple, Google, Microsoft, Pixar, and others, demonstrated that the idea that Silicon Valley plays fairly is an illusion. But even more unsavory abuses occur further down the food chain. H1-B visa workers, who are generally held in low esteem in the US since they compete with Americans, take a risk when they sign up with labor brokers, even seemingly legitimate ones like Tata Consultancy, part of the giant Tata Group in India.

As the NBC video below, part of a joint investigation with the Center for Investigative Reporting, explains, the most abusive recruiters are body shops, who abuse the H1-B program by bringing in technology graduates when the firm in fact has no job lined up. The Indian immigrants are hostage, kept in guest houses where they are told not to go outside until they find work.

Yanis Varoufakis: Why the European Bank Stress Tests Have to be Phony

Yves here. I have to admit I never focused on what turns out is a blindingly obviously reason why the European bank stress tests are an exercise in optics. Even though this website derided the US stress tests as a cheerleading exercise, and earlier criticized the Administration for failing nationalize Citigroup as FDIC chairman Sheila Bair sought to do, the US authorities were in a position to Do Something about sick banks. Consider the European case (note I consider Yanis to be too charitable toward US bank regulators, but keep in mind that he’s comparing them to his home-grown version). And then you have the additional problem, which was widely discussed in 2009 to 2011 or so, that the apparent insolvency of states was the result of and bound up with the overindebtedness of European nations. Perversely, tha is almost never put front and center these days when the topic of seriously unwell European banks comes up.

How Serious is NY Fed Dudley’s Tough Talk About Fixing Banking Culture?

Last week, New York Fed President William Dudley gave a speech on remedying cultural problems in financial services firms, meaning the tendency of employees to loot them and leave the mess in taxpayers’ laps. It caught pretty much everyone by surprise because it contained two sensible and effective reform ideas, namely, that of putting compensation measures in place that would have the effect of rolling them a long way back towards the partnership model, as well as making it harder for bad apples to find happy homes in other firms.

My sources are of the view that Dudley was browbeaten into taking a tougher line by the Federal Reserve Board of Governors, specifically Danny Tarullo, rather than being keen to be more aggressive himself. Nevertheless, the fact that Dudley is pushing some tough ideas is an important shift, even if the New York Fed president was under pressure to look serious.

Revolt Starting in UK Over Private Equity Secrecy

Mirabile dictu, is a revolution against private equity secrecy starting on the other side of the pond, meaning in of all places, finance-dominated England?

Ilargi: Europe Redefines “Stress” in Its Bank-Boosterist Stress Tests

Yves here. As we’ve repeatedly pointed out, bank “stress tests” are officially-orchestrated bank PR. And the reason they worked so well the first time was that exercise was accompanied by all sorts of Administration “we’re fully behind the banks” messaging, including a commitment that any banks that fell short would get a heapin’ helping of new capital. But the effort to talk bank stock prices up worked so well that many, even the weaker ones, were able to float new shares.

The Europeans have tried emulating the Americans, but with more emphasis on the optics and less on prodding the banks to take meaningful steps to shore up their capital bases. Ilargi describes how even this exercise in porcine maquillage is failing to cover up the unhealthy state of many banks.