Tremble, Banks, Tremble
The key to financial recovery: restoring the rule of law on Wall Street.
James K. Galbraith
July 9, 2010 | 12:00 am
The financial crisis in America isn't over. It's ongoing, it remains unresolved, and it stands in the way of full economic recovery. The cause, at the deepest level, was a breakdown in the rule of law. And it follows that the first step toward prosperity is to restore the rule of law in the financial sector.
First, there was a stand-down of the financial police. The legal framework for this was laid with the repeal of Glass-Steagall in 1999 and the Commodities Futures Modernization Act of 2000. Meanwhile the Basel II process relaxed international bank supervision, especially permitting the use of proprietary models to value complex assets—an open invitation to biased valuations and accounting frauds.
Key acts of de-supervision came under Bush. After 9/11 500 FBI agents assigned to financial fraud were reassigned to counter–terrorism and (what is not understandable) they were never replaced. The Director of the Office of Thrift Supervision appeared at a press conference with a stack of copies of the Code of Federal Regulations and a chainsaw—the message was not subtle. The SEC relaxed limits on leverage for investment banks and abolished the uptick rule limiting short sales to moments following a rise in price. The new order was clear: anything goes.
Second, the response to desupervision was a criminal takeover of the home mortgage industry. Millions of subprime mortgages were made to borrowers with undocumented incomes and bad or non-existent credit records. Appraisers were selected who were willing to inflate the value of the home being sold. This last element was not incidental: surveys showed that practically all appraisers came under pressure to inflate valuations in order to make deals happen. There is no honest reason why a lender would deliberately seek to make an inflated loan. more
How Did Wall Street’s Looting Become Public Policy?
Wednesday, 07/7/2010 - 9:31 am
by Joe Costello
The economy can’t recover so long as we allow Wall Street to rob us blind.
Gretchen Morgenson has a good piece based on newly released documents concerning the single greatest crime committed by the looting class in the past two years, the bailout of Wall Street with the taxpayer payout of a hundred cents on the dollar for AIG’s worthless derivatives. Morgenson writes:
The documents also indicate that regulators ignored recommendations from their own advisers to force the banks to accept losses on their A.I.G. deals and instead paid the banks in full for the contracts. That decision, say critics of the A.I.G. bailout, has cost taxpayers billions of extra dollars in payments to the banks. It also contrasts with the hard line the White House took in 2008 when it forced Chrysler’s lenders to take losses when the government bailed out the auto giant.
But the best part of the piece is not only did Wall Street get the backdoor bailout:
When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman, Société Générale, Deutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years.
Any irregularities, that is more appropriately fraud, which was and remains rampant across the system. Fraud is the main criminal device of the looting class. Yves Smith digs deeper into the crime scene and its perpetrators. It’s essential to understand that many in government are not simply colluding with the looting class, but are full fledged members. Chris Whalen at IRA has a good piece on Public Enemy #1, Robert Rubin, writing:
Reasonable people might call Robert Rubin the chief architect of the financial crisis and also of Wall Street’s grand strategy to minimize the political damage from the subprime crisis. From his mismanagement of the U.S. Treasury’s dollar policy in the mid-1990s to his bailout for Mexico (for Goldman Sachs and other Wall Street dealers), to the rescue of Citigroup and AIG in 2008, Rubin has met or exceeded the most demanding expectations for duplicity from our public servants.
Nearly two decades after first migrating to Washington, he apparently is still calling the shots of U.S. financial and economic policy with the full support of President Barrack Obama. Working through his favorite marionettes, Treasury Secretary Tim Geithner and Economic Policy Czar Larry Summers, most recently Rubin managed the defense of Wall Street following the great crisis. more