Category Archives: Regulations and regulators

How Banks Influence People in High Places

This e-mail to Congressional staffers speaks for itself. I am probably being far too nice by omitting the RSVP details. However, I must note the ethics rules for Congress are more lax than those of some private sector companies. I had one client, a Fortune 25 company, that forbade all employees from taking gifts or entertainment of any kind from vendors, down to a cup of coffee. And that’s not as nuts as it sounds. Research by social psychologist Robert Cialdini verifies that a gift as small as a can of soda predisposes the recipient to a sales pitch.

From: The Financial Services Roundtable

New York Times’ Joe Nocera Blames Crisis on “Mania”, Meaning Victims

I often enjoy Joe Nocera’s take on Wall Street, but like some other well known financial writers, he has become overly close to his subjects. No where is this more evident than in a stunning little aside in an otherwise not bad piece on the Financial Crisis Inquiry Commision’s report, which points out that it is long on potentially helpful detail, short on analysis.

Here is the offending section:

But I wonder. Had there been a Dutch Tulip Inquiry Commission nearly four centuries ago, it would no doubt have found tulip salesmen who fraudulently persuaded people to borrow money they could never pay back to buy tulips.

Daniel Pennell: Mortgage Shenanigans in Virginia (The Wall Street – Washington – Richmond Axes)

By Daniel Pennell, a systems expert who has testified before the Virginia House of Representatives on MERS

This week demonstrated how financial special interests have created an obscene and incestuous relationship with the leadership in the state legislature and the Governor’s office in Virginia. This cabal managed to kill off a bill (HB-1506) proposed by Delegate Bob Marshall, a bill designed to protect the integrity of the county property records and preserve the integrity of home owner’s title to their property. Simultaneously they attempted to alter the Uniform Commercial Code (UCC) with HB-1718, such that any “record” (the previous version said document) signed or unsigned by a person they claim owed a debt would be good enough for the banks to win a legal judgment against a person. In other words a spreadsheet from a bank would be good enough to take someone’s home or report someone to a credit bureau.

FCIC Insider: “I Can’t Believe They Suborned Brooksley Born”

The Financial Crisis Inquiry Commission released its report yesterday and went into PR overdrive. Journalists and the public are still digesting the weighty document, and various tidbits, like the report that Goldman did indeed profit from the AIG rescue, are touted as news when the basic facts were already in the public domain.

What is troubling about the report is the manner in which it hews to conventional wisdom. Its ten major findings are hardly controversial, yet they are still insufficient to explain why the financial system seized up and appeared close to failure. And telling a familiar-sounding story assures that the status quo will remain unchallenged, and serves to validate the inadequate reforms now underway. After all, they are premised on the very same superficial beliefs.

I participated in a blogger conference call with FCIC commissioners Phil Angelides and Brooksley Born. I’m clearly not cut out for public life. It was disconcerting to hear them thumping their talking points.

But the stunning part were Angelides’ and Born’s answers to my questions.

Ian Fraser: Is the House of Lords’ Crisis Inquiry Putting the FCIC to Shame?

Yves here. Although this post deals with a specific aspect of the House of Lords inquiry, note how it focuses on mechanisms that led to bank insolvency, in this case, how dubious accounting produced exaggerated profit reports, and along with it, looting (as in paying out funds to insiders to a degree that put the survival of the firm at risk).

By Ian Fraser, a financial journalist who blogs at his web site and at qfinance.

The many inquiries into the financial crisis have turned over plenty of stones but have failed to find any smoking guns. But the House of Lords economic affairs committee’s inquiry “Auditors: market concentration and their role” is making strides in identifying and maybe rooting out the accounting shenanigans that lay at the heart of the crisis.

At a recent session of the HoL inquiry, UK-based investors said that IFRS (international financial reporting standards) had encouraged imprudent, reckless and even illegal behavior by UK and Irish banks, enabling them to deceive investors, boost executive bonuses and ultimately destroy their institutions at taxpayers’ expense.

Quelle Surprise! Goldman Profited From AIG Bailout Via Abacus Trades (You Read It Here First)

Shahien Narisipour at Huffington Post revealed that the FCIC report, due to be released officially tomorrow, shows that contrary to its pious assertions to the contrary, Goldman received funds for its own account from the AIG bailout, to the tune of $2.9 billion.

Why is this significant? Because Goldman maintained that the monies it received from the rescue were for customer trades, not for its own account.

And while this may seem to be news, it isn’t, except for putting a firm dollar value on what Goldman received for its own account. We posted on Goldman’s AIG exposures both as principal and agent on February 7, 2010, and specifically flagged that the Abacus trades that Goldman insured with AIG were principal positions, not client trades. We caught some flack for it by the time from various commentators who seemed more persuaded by Goldman’s PR that the extensive work done by Tom Adams, which we presented in a series of posts in early 2010 (see here, here and here for some examples).

From the February 2010 post:

State Banks, or, If You Can’t Regulate TBTF Banks, Why Not Compete Instead?

Once in a while, you’ll see stories pop up about state governments looking into setting up a state bank, Washington being the latest sighting, along the lines of the only state bank in the US, the Bank of North Dakota. And there’s good reason. The Bank of North Dakota has an enviable track record, having remained profitable during the credit crisis. Moreover, in the ten years prior, the bank returned roughly half its profits, or roughly a third of a billion dollars, to the state government. That is a substantial amount in a state with only 600,000 people. The bank was also able to pay a special dividend to the state the last time it was on the verge of having a budget deficit, during the dot-bomb era, thus keeping state finances in the black.

But the good financial performance is simply an important side benefit. The bank’s real raison d’etre is to assist the local economy. And it has done so for a very long time. It was established in 1919 as part of a multi-pronged effort by farmers to wield more power against entrenched interests in the East.

And the most important potential use of this type of bank in our era could again be to level the playing field with powerful interests, in this case, the TBTF banks.

Bill Black: Why our Fundamental Approach to Banking Regulation is Inherently Unsound

Our current approach to banking regulation exposes us to recurrent, intensifying financial crises. The good news is that because we reached an all time low in Basel II, Basel III almost has to be an improvement. The bad news is that Basel III has not reexamined the fundamental assumptions underlying the Basel process. As a result, Basel III will be a variant on the common ineffective theme of banking regulation designed by economists and the industry.

The Basel process is built upon three flawed assumptions.

1. Capital requirements are the ideal form of banking regulation.
2. Capital requirements can be set without establishing sound accounting.
3. Accounting control fraud is not a serious concern.

Capital requirements are the ideal form of banking regulation under conventional economic wisdom. The attraction of capital requirements to neoclassical economists is elegance. Their theory is that while private market discipline ensures that normal corporations are inherently safe, private market discipline poses an inherent dilemma for banks.

Financial Crisis Inquiry Commission Makes Criminal Prosecution Referrals

Given that the Financial Crisis Inquiry Commission has found what it sees as ground for criminal prosecution, apparently extending to several yet to be named Wall Street executives, what are we to make of the exodus of its Republican members? That they prefer rule by banksters to rule of law?

I must confess I had little hope for the FCIC having any impact. The unduly short time allotted to it, its composition (not enough representation of individuals at the commissioner level with meaningful expertise) and its restrictions on issuing subpoenas (which effectively required sign off from members of both parties) seemed intended to hamstring it. The fact that they’ve gotten this far, and may make more waves with the issuance of their report, which is due out later this week, is an unexpected positive development.

Shahien Narsiripour of the Huffington Post broke this story but juicy details appear thin at this juncture:

John Hempton: What to do with Fannie and Freddie

By John Hempton, a Sydney-based investor, recovering financial services analyst, and former Australian government official who writes at Bronte Capital

There are a bunch of ideologues out there with solutions to the Fannie and Freddie situation. They argue that government intervention has to end and then propose a system with a permanent role for government. It is not just nonsensical – it is usually in the interest of some large financial institution. All they want is Frannie out of their part of the business. They like government subsidies in the rest of their business.

Anyway I have the free market solution to the Fannie and Freddie situation – and – I hate to say it – it is dead obvious.

MERS Exposed I: Process Expert Catalogues Fundamental Flaws

Proposed legislation in Virginia, House Bill 1506, which if passed would eliminate the role of the electronic registry system MERS in that state by requiring every mortgage transfer to be recorded in the local courthouse, is having the salutary effect of exposing more information about this generally less than forthcoming company.

Various interested parties offered testimony about the bill. One particularly interesting presentation came from a process and systems expert, Daniel Pennell, who was operating in a private capacity as a concerned citizen. His presentation raises numerous red flags about MERS.

Bank Board Member Proposes Legislation in Virginia to Change UCC to Help Banks Escape Foreclosure Woes

Earlier this week, we discussed how several measures proposed in Virginia would have the effect of redressing the power imbalance between banks and borrowers in the foreclosure process. One would give borrowers more time to mount defensed (Virginia has one of the fastest track processes in the US); another would require judicial approval for a foreclosure to become final. But the farthest-reaching proposal would force banks to maintain accurate property records in local government offices, which would end the use of MERS in that state.

Not surprisingly, the industry is not about to let this go down without a fight.

More Evidence of Undercapitalization/Insolvency of Major Banks

Even as we and other commentators have noted the underlying weakness of major bank balance sheets, which have been propped up by asset-price-flattering super low interest rates and regulatory forbearance, we still witness the unseemly spectacle of major banks keen to leverage up again. The current ruse is raising dividends to shareholders, a move the Fed seems likely to approve. Anat Admati reminded us in the Financial Times on Wednesday that we are about to repeat the mistakes of the crisis:

To Bailout or Not to Bailout: Mortgage Mess Endgames Emerging

In the last week, several ideas for fixing the housing market have surfaced. One is the Third Way proposal, which appears to be an Administration trial balloon. Predictably, it is yet anther bailout, with plenty of smoke and mirrors to disguise that fact.

A second proposal, from Sheila Bair yesterday, is to establish a “foreclosure claims commission“. This scheme sounds more promising that the Third Way proposal, but is very likely to wind up in bailout territory.

Third is a not-widely-covered plan by Senator Jeff Merkley.

The Merkley proposal is pro consumer and pro investor; the other two are pro bank. Sadly, it isn’t hard to see which is likely to prevail in the absence of public pressure.