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Regulatory Capture Bulletin, 2010

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[Dec 21, 2010] Is Regulation Really for Sale

December 20, 2010 | Economist's View

Howard Davies, chair of the UK's Financial Services Authority from 1997-2003, defends regulators against the claim that they are bought and sold by the financial industry (though he's less sure about legislators), but admits they were subject to "intellectual capture" prior to the crisis:

Is Regulation Really for Sale?, by Howard Davies, Commentary, Project Syndicate: narratives of the financial crisis, regulatory capture is often an important part of the story. ... How plausible is this...? Can ... regulation really be bought?
When I was a regulator, I would certainly have denied it. I had never worked in the financial industry, and knew few people who did. ... My successors have all come from the financial sector, however...
I have no first-hand knowledge of the legislative process in the United States. But, as an outsider, I am amazed at the apparent intensity of lobbying, and at the amounts of money that firms and their associations spend. Is it effective? ...
An intriguing sidelight on the relationship between Congress and business is provided in a study by Ahmed Tahoun of the London School of Economics on "The role of stock ownership by US members of Congress on the market for political favors." ... The ... results ... suggest a less-than-healthy relationship between lawmakers' political and pecuniary interests.
Regulators are typically not subject to those temptations. They are not normally allowed to own stock in financial firms... But can they nonetheless be captured?
I see two potential grounds for concern. The first is the revolving door between the industry and regulatory bodies. This is more prevalent in the US...
The second concern is what one might call intellectual capture. While I would strongly argue that the FSA in my day did not favor firms unduly, it is perhaps true that we – and in this we were exactly like US regulators – were inclined to believe that markets were generally efficient. If willing buyers and willing sellers were trading claims happily, then, as long as they were "professional" investors, there was no legitimate reason to interfere in their markets. ...
We now know that some of these market emperors had no clothes, and that their activities ... could result in severe financial instability and generate serious losses for taxpayers, not to mention precipitating a global recession. That has been a grave lesson for regulators and central banks.
So intellectual capture is a charge hard to refute. But were regulators surrogate lobbyists for the financial industry? I do not think so, and to argue as much devalues the efforts of many overworked and underpaid public servants around the world.

"Is Regulation Really for Sale?" The intellectual capture Davies owns up to was no accident, it was the product of a concerted effort -- funded in part by big money interests on the right -- to sell these ideas to policymakers, regulators, and the public more generally. And as Paul Krugman's column notes today, it's an effort that had and continues to have considerable success. Thus, I don't think we can separate intellectual capture from lobbyist and other activity promoting the free market, anti-regulation point of view.


Regulatory capture theory by way of public choice school of economics assumes the same incentives are operative in the private market and government sector.

To be consistent with this intellectual capture theory would mean that regulators have been brainwashed on the one hand while in private markets it would make no difference whether markets are efficient or whether anyone believes they are.

Richard Hoogesteger:

The situation in Britain is not the same as in the United States. There are several reasons for this. First senior regulators in Britain are generally career civil servants. In the U.S. they are political appointees. Second the politicians who appoint them must raise enourmous amounts of money to run for office. This makes conflicts of interest almost impossible to avoid. These conflicts extend into academia which is financed by by government and the business community. For an amusing though disturbing take on this see the movie "Inside Job".


Howard Davies is a day late and a dollar short.

Janet Tavakoli's Fraud as a Business Model powerpoints Mary Shapiro's appalling record at FINRA and today heads the SEC. Then there was Rubin during Clinton years who engineered the repeal of Glass-Steagall and garnered a job at Citigroup. Weill called Secretary Bailout Bob Rubin who reportedly quipped, "You're buying the government?"

Greenspan and Summers shutdown Brooksley Born on derivatives, and then there's the Paulson snake dance upon his knees to Pelosi to save his alma mater Goldman Sachs, etc....The Bush administration finished the job of clearing out employees with a conscience and integrity.

"America is a hurricane, and the only people who do not hear the sound are those fortunate if incredibly stupid and smug... who live in the center, in the serene eye of the big wind."

Norman Mailer

rps :

"The intellectual capture Davies owns up to was no accident, it was the product of a concerted effort..."

As in Dante's Inferno, we are experiencing the third circle of hell, "The gluttons lie here sightless and heedless of their neighbours, symbolising the cold, selfish, and empty sensuality of their lives..." The fourth circle, Greed, "Why do you hoard? Why do you squander?," and the Eighth circle Fraud, cantos are devoted to the fraudulent advisers or evil councillors, who are concealed within individual flames. These are not people who gave false advice, but people who used their position to advise others to engage in fraud......."

Human nature. "The real problem is in the hearts and minds of men. It is not a problem of physics but of ethics. It is easier to denature plutonium than to denature the evil from the spirit of man." Albert Einstein

Author: Albert Einstein

Highgamma :

"Thus, I don't think we can separate intellectual capture from lobbyist and other activity promoting the free market, anti-regulation point of view."

When I think of regulatory capture, I think of the old "Ma Bell" AT&T or electric utilities. Those guys wouldn't have known a free market if it hit them on the head. I believe that you are confusing "free market, anti-regulation" with the "regulated" crony capitalism that we have.

These guys aren't getting government to stay out of their way. They're getting government to do their bidding: hobble their competitors, block entrants, strengthen their market power, and socialize their losses. There's no "free market" in any of that, but I fear that with this new drumbeat for more government control, we will get a great deal more "regulation" that will really be more crony capitalism.

Mark The Lesser :

Much of the discussion of regulatory capture misses the point. Regulators operate in the real political world, with leaders appointed by presidents. If the head of a regulatory agency is someone who is skeptical of active, aggressive enforcement actions (and private litigation against wrongdoers -- in general, the skepticism goes hand in hand) then it becomes tougher (if not impossible) to regulate and enforce the laws.

Large institutions are effectively given a pass, partially because they are too big to sue (i.e., you can't do anything to hurt them) and because top regulators (who make the decisions on whether to sue such institutions) don't believe that people of such high integrity should get sued (See Madoff, AIG, etc) or believe that such institutions just need "guidance", not an enforcement suit.

Add to the skepticism of top regulators about suing "respectable" people and institutions (which generally pervades those brought in directly from the industry) with the fact that funding and personnel can be cut if the organization is too aggressive or the jurisdiction can be taken away (See the Commodities Modernization Act) and regulators get de-toothed.

In addition, statements by former regulators (or current regulators) that they haven't been or weren't "captured" should taken with a grain of salt the size of a very large pillow unless that person has supported SUING and prosecuting violators and taking away their profits, their prerogatives and the positions in industry. Saying that one is in favor of effective enforcement means little.

It is the willingness to take strong legal action, in public and in the courts that shows a real willingness to enforce the laws. This means, for both regulators and legislators, a willingness to set tough standards for behavior, allow suits for such behavior based upon liberal, reasonable standards of proof and pleadings, and to back up those who seek to enforce the laws. While almost every regulator would deny being co-opted and would say (and perhaps believe) that they believe in vigorous, effective enforcement of the securities, commodities and other laws, when push comes to shove, most don't actually believe in enforcing the laws -- perhaps because they believe that nice people like them wouldn't violate the law. But, "nice" people violate the law all the time.

So the problem is finding leaders and lawyers (because they are the ones who really do the enforcement) who believe in actually suing people who commit fraud or violate regulations and hitting them very hard rather than working things out, but who aren't going to get too novel in their theories. Truth be told, there is almost always plenty of middle of the road enforcement to be done -- it just needs to be done in a committed way and pursued aggressively against anyone (no matter how big) who violates the law.

But until you can find and hire people who will do so and get Congress (and the presidency) out of protecting large and "respected" people and institutions, you have "capture" in a very real sense. And that has been the fate of U.S. regulation for most of the last 20 years. If we do not get regulators who are committed to and focused on bread and butter litigation and enforcement, but who are aggressive in novel ways without strong bread and butter enforcement first, we will lose whatever chance we have to get real regulation and avoid "capture" of our regulatory agencies.

Of course, that's just my opinion, and it could be wrong (not really, its right).

Mark The Lesser

[Sep 10, 2010] Sheehan on Michael Boskin By Frederick Sheehan

- January 19th, 2010 | The Big Picture

Frederick Sheehan is the co-author of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve.

His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans.


On January 14, 2010, an academic economist took a rare stance. Tenured professors rarely lift the veil from numbers that governments invent. In "Don't Like the Numbers? Change 'Em," Michael J. Boskin, Ph.D., formerly, an economics professor at Harvard and Yale; formerly, chairman of the Counsel of Economic Advisers in the George H.W. Bush administration; currently, T. M. Friedman Professor of Economics at Stanford University; research associate at the National Bureau of Economic Research; senior fellow at the Hoover Institution; and board member of the Exxon Mobil Corporation, Oracle Corporation and Vodafone PLC (among others), wielded his sword.

The Wall Street Journal devoted a half page to Boskin's list of offenders. Politicians are interfering with the Gross Domestic Product calculations in France and Venezuela. They have toyed with the inflation rate in Argentina. In the U.S., the Obama administration has taken the phony numbers game "to a new level." Here, Boskin is writing of the current adminstration's calculations of jobs "created or saved" from its stimulus bill.

The "created or saved" job calculation is nonsense, but the very last person one would expect to decry the miscarriages is Michael J. Boskin.

In the early 1990s, Senator Patrick Moynihan from New York warned his fellow legislators about rising social security commitments. Then the worm crawled out of his hole, so to speak. Federal Reserve Chairman Alan Greenspan testified before the Senate and House Budget Committee on January 10, 1995. He told the Committee the inflation rate was probably overestimated by 0.5% to 1.5%.

If Greenspan was correct, this was a godsend. Social security payments are increased each year at an inflation rate calculated by the federal government: the change in the Consumer Price Index (CPI). If the CPI could be increased at a lower rate in the future, benefits would rise more slowly, without Congressional action. This would reduce government spending and delight politicians, who knew of the looming crisis in social security but did not want to imperil their careers by reducing benefits, or, in this case, by cutting the rate at which social security benefits were raised each year.

The Boskin Commission was duly formed. Michael Boskin was the right man for the job. He had served as chairman of the President's Council of Economic Advisers (CEA) from 1989 to 1993, a post previously held by such government functionaries as Arthur Burns and Alan Greenspan.

Jumping to the conclusion, the Boskin Commission's Report, as it was known (formally, the "Advisory Commission to Study the Consumer Price Index") found that inflation was overstated by 1.1%. Several recommendations were made by the Commission to the Budget Committee. These were instituted with great efficiency by the Bureau of Labor Statistics.

The changes have lopped off far more than 1.1% in most years since 1997. From the time the changes were instituted through 2008, the compounding of an artificially low Consumer Price Index reduced payments to social security recipients by about half (according to John Williams, author of the newsletter Shadow Government Statistics).

How the CPI calculation was changed is not important here. (Chapter 12 of my book Panderer to Power is devoted to the Boskin Commission.) One adjustment may help to understand Boskin's contribution to the impoverishment of older Americans. "Hedonic adjustments" by government number crunchers substitute imaginary prices for prices actually paid. Hedonic adjustments (purportedly, the "quality improvement" of an item) reduce the CPI. (Hedonic adjustments had been employed before the Boskin Commission, but sparingly. Afterwards, even the prices of textbooks – if they had color graphics – were adjusted for quality.)

Steve Leuthold, founder and chief investment officer of the Leuthold Group, calculated the price of a new car in the U.S. had risen from $6,847 in 1979 to $27,940 in 2004. Using hedonic adjustments, the government calculated the price of a new car had risen from $6,847 in 1979 to $11,708 in 2004.

The Boskin Commission was one scandal that economists actually denounced. Greg Mankiw, chairman of George W. Bush's Council of Economic Advisers from 2001-2003, said at the time "the debate about the CPI was really a political debate about how, and by how much, to cut real entitlements."

Barry Bosworth of the Brookings Institute called the revised CPI an " 'immaculate conception' version of deficit reduction in which spending is cut without Congress taking the blame."

Jack Triplett of the Brookings Institute extended the argument: "What I liked least about the Commission Report was exactly what made it so influential – its guesstimate of 1.1 percentage points of bias….The Commission (and others that have followed) used ad hoc reasoning to come up with a number…."

Jacob Ryten, from the Canadian statistical office, wrote in the same vein: "Without the guesstimates, the Commission Report was just another dry, academic study to be perused by professionals… Conversations with Committee members suggest that some, at least, were ill at ease themselves with guesstimates…. My personal preference is to resist the seductive blandishments of politics and politicians…."

Jack Triplett chided the Report as succumbing "to the lure of political statements in its choice of language to describe the effect of CPI measurement errors on Social Security expenditures…. Professionals at any rate, should understand that improving the accuracy of the CPI is not the same thing as improving the basis for allocation to the dependent population…."

Professionals, at any rate, have seen fit to keep Michael Boskin at the summit after he succumbed to "seductive blandishments of politics and politicians." It cannot be said that Boskin dishonored his profession, since he is still a superstar. Other professions institute bodies such as the American Bar Association and the American Medical Association that take action against negligence.

Federal Reserve Chairman Ben S. Bernanke, another pliant alumnus of the CEA, sits before the Senate claiming there is no inflation in the economy. He uses the CPI as his measure, taking the additional step of removing food and energy costs.

Near the end of his Wall Street Journal effort, Boskin wrote of the Obama job numbers: "One piece of good news: The public isn't believing much of this out-of-control spin." He's probably correct, but spinning the number of jobs "created or saved" has no consequence, other than to increase the public's distrust of government. The distortion of the CPI should have been censured by his profession, if it is that.

Frederick Sheehan is the author of Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession

[Aug 05, 2010] Taleb Calls Out Alan Blinder for Questionable Ethics

Nassim Nicholas Taleb has an intriguing piece at Huffington Post, "The Regulator Franchise, or the Alan Blinder Problem," with a juicy anecdote at its core. It highlights a critical issue: how we've come to accept what other eras would view as corruption as business as usual. Note that Taleb does a particularly artful job of writing in this piece; he highlights the ethics issue with finesse (as well as pointing out his own foibles), so I suggest you read it in full.

Here's the trigger: last year at Davos, Blinder interrupts Taleb's conversation with a third party to pitch a savings product, one that allows high net worth individuals to arb FDIC insurance regs by allowing them to put funds in a single account, which would then be split up among banks so that the investor would circumvent regulations that limit FDIC insurance (then $100,000 per account).

Now it's already a bit unseemly for a former Fed vice chairman to be peddling investment products personally, particularly since, per Taleb:

….it would allow the super-rich to scam taxpayers by getting free government sponsored insurance. Yes, scam taxpayers. Legally. With the help of former civil servants who have an insider edge.

I blurted out: "isn't this unethical?" I was told in response, "We have plenty of former regulators on the staff," implying that what was legal was ethical.

Taleb then goes on to stress why this matters:

Alan Blinder is certainly not the worst violation of my sense of ethics; he probably irritated me because of the prominence of his previous public position and due to the context of the Davos conversation, which was meant to save the world….

Tell me if you understand the problem in its full simplicity: former regulators and public officials who were employed by the citizens to represent their best interests can use the expertise and contacts acquired on the job to benefit from glitches in the system upon joining private employment - law firms, etc.

Think about it a bit further: the more complex the regulation, the more bureaucratic the network, the more a regulator who knows the loops and glitches would benefit from it later, as his regulator edge would be a convex function of his differential knowledge. This is a franchise. (Note that this franchise is not limited to finance the car company Toyota hired former U.S. regulators and used their "expertise" to handle investigations of its car defects).

Yves again. This may all seem to be so "dog bites man" in America so as to no longer elicit any outrage. The famed regulatory revolving door, and all the benefits that former officials and their new private sector masters gain from a legally permitted but socially destructive form of trading of insider know how is now considered business as usual in the US.

It's remarkable to see how quickly conditions have decayed in the US. One of my colleagues, Amar Bhide, wrote a Harvard Business Review story in 1994 that was completely sincere (and would have been seen as accurate then) in describing one of the critical advantages of the US capital markets was that they weren't simply the deepest, but also the cleanest in the world, with sound regulations, best investor investor protection, the most wide ranging disclosure.

Yet it is also clear that sound regulations can confer competitive advantage. When Singapore exited the British empire, the prospects for the island nation were poor: no manufacturing base, no commodities to exploit. Yet Lee Kwan Yew developed and executed what amounted to a national strategy, with two foundations. First was making sure the public was exceptionally well educated by Asian/emerging market standards, on the assumption that all he had was human capital. Second was the recognition that corruption was endemic to developing nations, and that having clean government would confer advantage. Yew set out to create a bureaucracy that would be hard to corrupt, and that rested on creating good incentives. Top bureaucrats were and are paid at the same level as private sector professionals (think top law firm partner). There's little incentive to trade on your office if you don't have much to gain. Tough internal audit was another critical aspect of this program.

But legalistic regulatory evasion has also become so commonplace as to blunt most people's sense of where to draw the lines. One of the unacknowledged problems of the crisis is that the financial system has too little equity precisely because banks and their regulator enablers pursued securitization. The effect was to de equitize huge swathes of the credit markets (the growth of the an $8 trillion, give or take a couple of trillion, shadow banking system with pretty much no equity behind it, is the end product of this development). Regulators, financiers, and academics all touted the virtues of securitization, and its cost savings. Bullshit. The process has more moving parts, more parties ripping up front fees out of the deals. So where to the vaunted cost savings come from? De equitization, from reducing risk buffers for lending that had been deemed necessary provisions against losses. The "you'll be on this bus or under the bus" charts McKinsey would show to clients in the 1980s explaining why securitization was inherently cheaper than on balance sheet lending showed two, and only two, big sources of expense savings: the elimination of bank equity and FDIC insurance costs.

So the "innovation" that regulators, academics, consultants, and banks were all advocating more than 20 years ago was regulatory arbitrage, pure and simple. When you have regulators undermining the rules and depicting it as virtuous, behavior like Blinder's is simply more of the same.

Taleb describes why this behavior has become hard to root out:

First, the more complicated the regulation, the more prone to arbitrages by insiders. So 2,300 pages of regulation will be a gold mine for former regulators. The incentive of a regulator is to have complex regulation.

Second, the difference between letter and spirit of regulation is harder to detect in a complex system. The point is technical, but complex environments with nonlinearities are easier to game than linear ones with a small number of variables. The same applies to the gap between legal and ethical.

Third, regulation, like drugs, has side effects, and like drugs, it can harm the patient - something in my work I call the iatrogenics (harm done by the healer). People do not mention that regulation helped promote the Value-at-Risk method of risk measurement in replacement to age-tested heuristics - these methods blew up banks.

Fourth, we need a more severe monitoring of the activities of public officials and a solution to the following conflict. In African countries, government officials get explicit bribes. In the United States they have the implicit, never mentioned, promise to go work for a bank at a later date with a sinecure offering, say $5 million a year, if they are seen favorably by the industry. And the "regulations" of such activities are easily skirted.

Fifth, and more philosophically: during the lunch with Arianna, the conversation kept sliding into the ethical basin of attraction, the compatibility of some professions and service of the public. The Greeks had respect for the banausoi, those who had to make a living in the professions, but many argued against trusting them in running the affairs of the city on grounds that "a funeral goods merchant would not be trusted to wish for the good health of his fellow citizens." The point has been debated through the ages, from Xenophon to Seneca (who took the opposing point), but it is even starker today in the age of lobbyists and a shift in middle class values that tolerates the "everyone needs to make a living" even when the means to "make a living" are harmful to society.

These accumulated moral hazards have blown up banks and will keep blowing up the system.

Yves here. Unfortunately, the Obama administration had the opportunity execute more fundamental reform at the outset. Worse, Obama himself recognized it; he was reading biographies and speeches of FDR as president elect, yet chose to pass on an historical opportunity.

Although I have not read Depression era politics extensively, it appears two critical elements are missing now. One is that despite the chicanery of the Roaring Twenties, ideas like character and public service still meant a great deal. Those values are pretty much dead now. Second was that Roosevelt was not cowed by bankers or businessmen. For instance, when he told his economic advisers (rather out of the blue) that he was going off the gold standard (which the US had done as an expedient, but the assumption was it would go back soon) he was met with a firestorm of criticism which he airly brushed aside. I can't imagine any senior politician now having the confidence now to defy the will of the banking industry. And it isn't simply due to the role of corporate funding in campaigning; the roots are deeper. Being in office now is all about winning, about keeping one's hold on power, so it isn't surprising that everyone has a price.

Topics: Banana republic, Banking industry, Federal Reserve, Free markets and their discontents, Politics, Regulations and regulators, Social values

Email This Post Posted by Yves Smith at 5:23 pm

Selected Comments


This all makes eminent sense. We must be very skeptical of so-called reforms that make our already bewildering system of laws and regulation more complex. The complexity itself acts like a tax and is a huge source of corruption.

Ideally, the Federal government would be limited to a total body of laws and regulations no larger than a typical adult could remember.

August 4, 2010 at 5:33 pm
Hi Yves, just a couple of points…

When you say "how we've come to accept what other eras would view as corruption as business as usual" I think you underestimate the corruption that also pervaded other eras, even if it was a little different and applied to different circumstances. I'll leave it at that.

As to a good solution to regulatory capture, I had e-mailed you a solution that I personally came up with though I don't believe you gave yourself the time to read it. It's definitely something different…you should really take a look at what I wrote.

August 4, 2010 at 5:33 pm
The third critical element missing from the 30s is the existence of an alternative on the left - the trade union movement was decades old and quite active. That and the heady specter of Communism convinced the wealthy that Roosevelt wasn't the worst opponent they faced.
August 4, 2010 at 7:08 pm
"the heady specter of Communism convinced the wealthy that Roosevelt wasn't the worst opponent they faced"

I suspect you're right but the irony is delicious: communism was the best friend that capitalism ever had.

August 4, 2010 at 6:05 pm
Look on the bright side, stories like this are finally being told. Maybe it's not too late to turn the ship around…
The Polycapitalist
August 5, 2010 at 12:57 am
With all due respect to Yves' and Taleb's work (I'm a big fan of both) I think there are much better examples of corruption and abuse of former regulator status than this one.

The FDIC deposit insurance program does not prohibit a single individual from having multiple accounts at different banks in amounts below the FDIC insurance threshold, and therefore protected. So describing what Blinder and his company are doing as "circumvent(ing) regulations", as Yves does, is inaccurate.

One of the reasons the FDIC does not limit the number of accounts a single individual can have covered by FDIC insurance is that spreading that person's accounts across different banks diversifies risk.

Instead it would appear Blinder's firm is providing an efficient mechanism to utilize FDIC insurance within the FDIC's parameters.

August 5, 2010 at 2:14 am
Why even have a limit if you can run around it with the help of wall st ,while they take their cut, and push all of the risk to the tax payers?

I'm sure it's all very efficient.

In my mind the intent and letter of the law are very plain, 250 k per person per bank. Mr. Blinder, with the help of his other ex regulators, is setting up a "supra-bank" with no real efficiency beyond that of regulatory arbitrage. They also have no capital requirements, pushing all of that "real banking stuff" on to the people below them.

They are being paid to take advantage of the system. It's that simple and unethical. You can't legislate ethics, but you can legislate banking regulations. They did this a while ago, and the unethical Mr. Blinder ran right around the law.

August 5, 2010 at 5:13 am
The regulation in principle is intended to deal with an outsider figuring out what to do on his own. The limit, of course, is intended to provide a public backstop for the public's savings, not for rich rent-seekers, i.e. criminals.

It's not set up to be worked by a "public servant" who is really a traitor, selling his public service expertise to help outsiders game the system.

(Of course by now the system's been hijacked so that e.g. the practical intent of FDIC insurance is precisely to socialize the risks and costs of criminal activity. Traitors like Blinder have dedicated their careers to making it so.

That's precisely the state of affairs Taleb is deploring here.)

As for the "efficiency" Big Lie, we know for a fact that every action of the finance sector doesn't create wealth but destroys it. It does nothing but add cost and complexity. No one ever games the system to render "the economy" more efficient; he does it to render the economy less efficent. He does it only to render his own crimes more efficient.

Here's one study which finds that banksters and speculators destroy $7 of social wealth for every $1 they create.

So did you mean efficiency or Orwellian "efficiency"? I think we know what kind the Blinders and all other system criminals always mean.

Andrew Bissell
August 4, 2010 at 6:09 pm
As Taleb himself sometimes notes, the most important element missing from the 30s is that we have not yet destroyed the bad debts choking the system, a process which was largely complete before Roosevelt even took office.

These bad debts - and the banksters who hold them - need to be liquidated. The associated economic pain cannot be avoided, and the question of whether it is done through massive defaults or inflation is mostly a matter of picking the marginal winners & losers (or, more accurately, the losers-of-a-little and the losers-of-a-lot).

August 4, 2010 at 8:57 pm
Andrew Bissell said: "…the most important element missing from the 30s is that we have not yet destroyed the bad debts choking the system, a process which was largely complete before Roosevelt even took office."

That is factually incorrect.

In Since Yesterday Frederick Lewis Allen describes the economic disaster Hoover's laissez faire ideology created which he then handed off to Roosevelt:

Hoover had tried to keep hands off the economic machinery of the country, to permit a supposedly flexible system to make its own adjustments of supply and demand. At two points he had intervened, to be sure: he had tried to hold up the prices of wheat and cotton, unsuccessfully, and he had tried to hold up wage-rates, with partial and temporary success; but otherwise he had mainly stood aside to let prices and profits and wages follow their natural course. But no natural adjustment could be reached unless the burdens of debt could also be naturally reduced through bankruptcies. And in America, as in other parts of the world, the economic system had now become so complex and interdependent that the possible consequences of widespread bankruptcy–to the banks, the insurance companies, the great holding-company systems, and the multitudes of people dependent upon them–had become too appalling to contemplate. The theoretically necessary adjustment became a practically unbearable adjustment. Therefore Hoover was driven to the point of intervening to protect the debt structure–first by easing temporarily the pressure of international debts without canceling them, and second by buttressing the banks and big corporations with Federal funds.

Thus a theoretically flexible economic structure became rigid at a vital point. The debt burden remained almost undiminished. Bowing under the weight of debt–and other rigid costs–business thereupon slowed still further. As it slowed, it discharged workers or put them on reduced hours, thereby reducing purchasing power and intensifying the crisis.

It is almost useless to ask whether Hoover was right or wrong. Probably the method he was driven by circumstances to adopt would have brought recovery very slowly, if at all, unless devaluation of the currency had given a fillip to recovery–and devaluation to Hoover was unthinkable. It is also almost useless to ask whether Hoover was acting with a tory heartlessness in permitting financial executives to come to Washington for a corporate dole when men and women on the edge of starvation were denied a personal dole. What is certain is that at a time of such widespread suffering no democratic government could SEEM to be aiding the financiers and SEEM to be simultaneously disregarding the plight of its humbler citizens without losing the confidence of the public. For the days had passed when men who lost their jobs could take their working tools elsewhere and contrive an independent living, or cultivate a garden patch and thus keep body and soul together, or go West and begin again on the frontier. When they lost their jobs they were helpless. Desperately they turned for aid to the only agency responsible to them for righting the wrongs done them by a blindly operating economic society: they turned to the government. How could they endorse a government which gave them–for all they could see–not bread, but a stone?

The capitalist system had become so altered that it could not function in its accustomed ways, and the consequences of its failure to function had become too cruel to be borne by free men. Events were marching, and Herbert Hoover was to be among their victims, along with the traditional economic theories of which he was the obstinate and tragic spokesman.

Unfortunately, over the past 30 years, there has been a revival of the ideologies that Hoover embraced so vehemently, and with equally disastrous results.

Andrew Bissell
August 4, 2010 at 9:09 pm
Therefore Hoover was driven to the point of intervening to protect the debt structure–first by easing temporarily the pressure of international debts without canceling them, and second by buttressing the banks and big corporations with Federal funds.

"Laissez-faire," right. Sounds more like corporatism (and very similar to Obama's policies) to me. Unless "brook no liquidation" is now considered some kind of hands-off approach to the economy.

Andrew Bissell
August 4, 2010 at 9:25 pm
As far as the historical fact on debt defaults is concerned, the default rate and credit spreads peaked around 1932/1933:
August 4, 2010 at 10:31 pm
The fact still remains that your statement was false.

As your charts show, there may have been some defaults of B-rated bonds along the way, but the debt structure for all intents and purposes was kept intact, both under Hoover and under Roosevelt. Roosevelt actually streamlined the RFC's cumbersome bureaucracy and increased its funding, which meant not only faster but more aid for failing banks.

August 4, 2010 at 10:27 pm
"But no natural adjustment could be reached unless the burdens of debt could also be naturally reduced through bankruptcies. And in America, as in other parts of the world, the economic system had now become so complex and interdependent that the possible consequences of widespread bankruptcy -– to the banks, the insurance companies, the great holding-company systems, and the multitudes of people dependent upon them –- had become too appalling to contemplate."

So your source says. And you attribute this to laissez-faire policies? What precisely, can you tell me, was laissez-faire about the federal reserve act that bound all of these banks together? Or the prior long history, dating to Washington, of federal involvement in banking? Or about the gold exchange standard that had the entire world riding on two inflating currencies? Do you attribute the first world war and all of its fallout to "laissez-faire" ideology? A word is nothing without the ability to apply it, and your examples are poor fodder if they merely emulate your penchant for ignoring all context so that you might condense history into a label too small to hold it.

August 4, 2010 at 11:05 pm
It never ceases to amaze how the defenders of laissez faire think they can start the clock after the disastrous consequences of its implementation come home to roost.

Quoting Frederick Lewis Allen again, this time from Only Yesterday:

Meanwhile his [Coolidge's] Secretary of Commerce, Herbert Hoover, ingeniously helped business to help itself; on the various governmental commissions, critics of contemporary commercial practices were replaced, as far as possible, by those who would look upon business with a lenient eye; and the serene flattering pronouncements upon business and assurances that prosperity was securely founded.

An uninspired and unheroic policy, you suggest? But it was sincere; Calvin Coolidge honestly believed that by asserting himself as little as possible and by lifting the tax burdens of the rich he was benefiting the whole country -– as perhaps he was. And it was perfectly in keeping with the uninspired and unheroic political temper of the times. For the lusty businessmen who in these fat years had become the arbiters of national opinion did not envisage the Government as an agency for making over the country into something a little nearer to their hearts' desire, as a champion of human rights or a redresser of wrongs.

The prosperity band-wagon was bringing them rapidly toward their hearts' desire, and politics might block the traffic. They did not want a man of action in the Presidency; they wanted as little government as possible, at as low cost as possible, and this dour New Englander who drove the prosperity band-wagon with so slack a rein embodied their idea of supreme statesmanship.

August 4, 2010 at 11:25 pm
"So your source says. And you attribute this to laissez-faire policies? What precisely, can you tell me, was laissez-faire about the federal reserve act that bound all of these banks together? Or the prior long history, dating to Washington, of federal involvement in banking? Or about the gold exchange standard that had the entire world riding on two inflating currencies? "

Oh, so the banks went under because of the fact that they were "linked together" by the federal reserve, ie they were all part of the club? My guess is you're implying they drank the same shot of whiskey, am I right? Well? Tell me more, please….and please don't give me the interest rate argument, that has nothing to do with the banks being "linked".

"Do you attribute the first world war and all of its fallout to "laissez-faire" ideology? A word is nothing without the ability to apply it, and your examples are poor fodder if they merely emulate your penchant for ignoring all context so that you might condense history into a label too small to hold it."

Ok, let's forget about the depression for a second. Explain for all of us what happened to cause this crisis, in specific detail.

And it's funny that you tell us not to apply "laissez-faire" unless we give context, when those that support it most never give context, except to say NO GOVT. Then when a crisis occurs, you still blame the government despite the fact that you previously recognized the economy as "laissez-faire" and thus your solution is that it wasn't pure enough. Simple minded fool. You're nothing more than a charlatan, fooling yourself to believe an IDEOLOGY, something you yourself never give context to and never clearly define. Indeed, when will your pure laissez faire ever occur? Let me guess…"If only…" "IF ONLY…"


August 4, 2010 at 6:10 pm
In a society of sociopaths; the sociopaths rule.

We're doomed.

(Well, unless you're lucky enough to be a sociopath or are bringing up your kids to be sociopaths. Then, you're a winner!)

Hu Flung Pu
August 4, 2010 at 6:34 pm
I agree with Taleb's point but I think his choice of examples is not particularly good. He's referencing the CDARs program which allows people with more than $100K to deposit in a bank (actually I believe it's now $250K) to essentially spread around their deposits more easily. So, if you've got $1 million to deposit, instead of going to four separate banks and depositing $250K in each one, you can just go to your local bank and the CDARs program will do it for you/them. So, you maintain the relationship with one bank and that bank handles the distribution of the funds to the other three banks through CDARs. In exchange for this service – and that's what it is – the "rich" depositor receives a lower rate of interest than they would otherwise receive. So, this isn't really a "subsidy for the rich." The rich, after all, could do this themselves, but at a cost. The CDARs program pays them less interest in exchange for handling the diversification. I see nothing wrong in that, nor with former regulators being involved in the company that handles it. But, again, I do agree with Taleb's larger point. I just have a quibble with the specific example used.
Hu Flung Pu
August 4, 2010 at 7:57 pm
Yeah, but they're not "abusing government guarantees and subsidies" here. They're paying someone to help them do something they can legally do themselves. Now, if your argument is that NO ONE should be able to have a government guaranteed return via an FDIC-insured bank account, that is a debatable issue, but it's also a completely separate argument from the one Taleb is making.
August 5, 2010 at 2:25 am
How is this any different from ticket scalpers paying people to stand in line and buy tickets for the latest greatest show? Paying another person to go to war during a draft? Buying a kidney?

The intent is clear. The cost is borne by the deposit holders of other institutions under the umbrella of the FDIC, and if that isn't enough, the US tax payer.

This is how TBTF became TBTF.

ex-PFC Chuck
August 4, 2010 at 6:39 pm
We've drifted a long way from the principles of General George Marshall, who refused to write and publish his memoirs because he believed it would have been unethical for him to personally profit from work that the government had already paid him. He lived out his declining years on his military pension and modest personal savings and investments.
August 4, 2010 at 6:41 pm
as simple as this:

the system is corrupt from top to bottom, and that corruption with the signing of the financial reform bill is now enshrined in law

Peter T
August 4, 2010 at 7:22 pm
> Roosevelt told his economic advisers (…) that he was going off the gold standard (…) he was met with a firestorm of criticism which he airly brushed aside.

In retrospect, going off the gold standard was a major step out of the depression. Economics was the science that couldn't, and that hasn't changed, has it?

August 4, 2010 at 8:55 pm
You cannot possibly hope to prove this; every figure you could point to for improvement post-1933 is tainted by the money inflation Roosevelt brought with him. And the fact remains that the depression continued, unabated, until our factories were the only ones in the world left standing.

Suspension of specie payments was not FDR's brainchild, either. It had been occurring routinely in this nation for nearly 150 years. He was not "brave" to repeat this form of bank bailout, which had already led, long before he took office, to the creation of a corrupt and corpulent banking system. The schism between gold and paper was permanent this time only because the government, taking a cue from the banks, began issuing debt that it had no intention of paying back in full. You may call this bold, or you may call it unethical – this is, after all, a discussion that began on ethics – but do not be so convinced of success when not 80 years have elapsed, and the decisions of which we speak have yet to reach their final conclusions.

Andrew Bissell
August 4, 2010 at 9:28 pm
do not be so convinced of success when not 80 years have elapsed, and the decisions of which we speak have yet to reach their final conclusions.

It's no worse than when Bernanke would point to the Great Moderation as evidence of the success of the past 25 years of monetary policy. Oh wait ….

August 4, 2010 at 9:37 pm
No argument here. However Bernanke is only the comic relief in this play. FDR is one of the leads!
August 4, 2010 at 9:36 pm
Costard said: "…every figure you could point to for improvement post-1933 is tainted by the money inflation Roosevelt brought with him. And the fact remains that the depression continued, unabated, until our factories were the only ones in the world left standing."

That is factually incorrect. The "inflation" was imaginary, and the fears of inflation were unfounded and led to disastrous policy decisions.

In Since Yesterday Frederick Lewis Allen sets out what happened:

At last business conditions in the United States were definitely improving. The Federal Reserve Board's Adjusted Index of Industrial Production (which as you may recall had sunk as low as 58 and 59 in the crises of 1932 and early 1933, had leaped to 100 during the New Deal Honeymoon, had then slipped back to 72 by November, 1933, and had obstinately hung in the seventies and eighties throughout 1934) had now begun to show a pretty definite upward trend. By the beginning of 1935 it had risen as far as 90. By the end of 1935 it had reached 101. And after a brief relapse into the nineties, it swept on during 1936 to 104 in June, 108 in July and August, 109 in September, 110 in October, 114 in November, and 121 in December–within striking distance of the record figure of 125 which had been set in 1929.


Then see what happened to our familiar measure of the state of business in general, the Federal Reserve Board's adjusted Index of Industrial Production. (Do you recall its previous ups and downs? Its high of 125 in 1929, its low of 58 in 1932 and of 59 in the bank-panic month of 1933, its rush up to 100 during the New Deal Honeymoon, its decline to 72 as the Honeymoon ended, and its wobbling rise thereafter?) At the end of 1936 the index had touched 121, which looked distinctly promising. As late as August, 1937, it stood at 117. Then it ran downhill, month after month, until by May, 1938, it had sunk to 76. _In nine months it had lost just about two-thirds of the ground gained during all the New Deal years of painful ascent!

What had happened? During the latter part of 1936 and the early part of 1937 there had taken place sharp increases in the prices of goods–some of them following increases in wages during the CIO's offensive, some of them affected by armament orders from Europe, many of them accentuated by a general impression, among business men, that "inflation" might be coming and that one had better buy before it was too late. The price of copper–which you will recall especially disturbed the President–had jumped in five months from 10 cents a pound to 16. Business concerns had been accumulating big inventories. When the time came to sell these goods at retail to the public, the purchasing power to absorb them just was not there.

For new investment still lagged; and what was more, the government spending campaign, which had kept pumping new money into the economic system, had been virtually halted. During the summer of 1937, Henry Morgenthau, the Secretary of the Treasury, had persuaded the President to make a real attempt to balance the budget; and although it did not yet seem to be quite in balance, nevertheless when one took into account the Social Security taxes which were being levied (and were not counted on the credit side of the budget, being set apart in a separate account), the government was for a time actually taking in from the public more than it paid out.

Result: the goods which were piled up on the shelves moved slowly. Business men became alarmed and cut production. Two million men were thrown out of work in the space of a few months–and became all the less able to buy what was for sale. The alarm increased, for men well remembered what a depression was like and were resolved to cherish no false hopes this time. The vicious spiral of deflation moved with all the more rapidity. Thus out of that apparently clear sky–no great speculative boom in stocks or real estate, no tightness in credit, no overexpansion of capacity for making capital goods (in fact, not nearly enough expansion)–came the Recession of 1937-38.

August 4, 2010 at 9:55 pm
I specifically said "money inflation", not "inflation", with the point of reference being March 1933. Your source, speaking about 1937, concurs:

"…the government spending campaign, which had kept pumping new money into the economic system, had been virtually halted."

August 4, 2010 at 11:27 pm
Call it what you may, but your original assertion that the "depression continued, unabated, until our factories were the only ones in the world left standing" is patently false, as Frederick Lewis Allen amply demonstrates.
August 4, 2010 at 11:28 pm
Money inflation?

Can someone please explain to me what this plebeian is referring to?

Bo J
August 4, 2010 at 7:37 pm
This is a little off point, but a few weeks ago I heard Nicholas Taleb speak. I then read his book and thought it was amazing. Today I was reading Yves Smith's book, ECONNED, and there are parts of Ch. 2 that sounded like Smith and Taleb were either collaborators or of similar cloth. Now this post (which I wholly agree with).

I've personally witnessed this pandemic and its very sad. As an insider I know there are a lot of good people doing their work in an ethical manner. Unfortunately, like most professions, there are those who do game the system and the seduction to turn to the dark side is always implicit.

Tom Hickey
August 4, 2010 at 7:50 pm
Trouble brewing. The stuff like this is piling up.

67% of Political Class Say U.S. Heading in Right Direction, 84% of Mainstream Disagrees

August 4, 2010 at 8:26 pm
"it isn't simply due to the role of corporate funding in campaigning"

No, but it's still the biggest piece of the puzzle.

Doc at the Radar Station
August 4, 2010 at 8:32 pm
This is worth a read to provide additional context: ;
August 4, 2010 at 8:42 pm
"So the "innovation" that regulators, academics, consultants, and banks were all advocating more than 20 years ago was regulatory arbitrage, pure and simple. When you have regulators undermining the rules and depicting it as virtuous, behavior like Blinder's is simply more of the same."

Productive economic behavior has been left for another time while gaming the system is a full time profession. America's love affair with getting rich and richer doesn't mean risking your money rather OPM legally acquired via the political and regulatory system is what's left of our economic heritage.

August 4, 2010 at 8:44 pm
The big difference is that there was a international Communist movement that scared the crap out of capitalists in the 1930's and that appealed to working people. FDR's liberal policies, like Keynes, could be sold to smarter sections of the elite as a way to 'save the system' because the alternative , expropriation of private capital, was so much worse.

Without any push back from working people, this will just continue onwards until the entire system blows up in an orgy of greed and militarism in a way that will make 2008 seem like a picnic. But that could be a long way away.

August 4, 2010 at 9:16 pm
"The big difference is that there was a international Communist movement that scared the crap out of capitalists in the 1930's and that appealed to working people."

Which proves the capitalists right – competition is what makes 'em do a good job. Ironically capitalism, without the competition of communism, has become degenerate rent seeking.

Pat Walker
August 4, 2010 at 9:07 pm
Hi Yves,

With the highest respect, people are naiive.

If the highlight of the American experience was Watergate, were without a shot being fired, the PTB were replaced in their entirety. All due to a generally educated, informed and involved populace and Congress that understood public service. Yes, our Constitutional framers would have been proud.

Now we have a specialty educated populace who is uninvolved, uninformed to the point of purely parochial, local views and completely uncaring. We let "Volunteers" do the dirty, bloody job of fighting, dying, and becoming physically and mentally scarred for life. When 66 GI's die in Afghanistan in a month, people don't demonstrate, not even a wince - they take the view that our soldiers knew the chances when they Volunteered and it comes with the occupation.


Politicians, officials, most everyone makes deals - It's reasoned that the End justifies the means. In fact, they reason, there is no one to notice or care.

In fact - regulators, prosecutors, those in positions of Public Trust (How Quaint) are all part of the team effort. Look the otherway, so do the majority of American citizens - unless you are out of a job, out of benefits, and perhaps have hungry kids - Then suddenly you care, but it's too late.

Does anyone ever tell the truth ? Do people even know what truth is ?

The New Regime:

Today, we live in a complex society were labryinthe problems often require Machiavellen solutions where decisions must be only left to those who are on the inside –where the average citizen wouldn't understand, and seemingly doesn't care. Truth, Justice Equality, Integrity, Character, Ethics - They are all too often simple, quaint, too well defined concepts that have no place in today's governance. After all, most people don't question a doctor's decisions - so why should one question your leaders decisions. If a little protest helps the medicine go down, so be it.

Power Trumps Money &, Money Trumps Individual Rights

The last vestige of a bygone America that still lives are the men and women of our uniformed services - They have no collective unions to voice grievances, no petty beefs - They do as they are told for the protection of America

– That is until they are finally disillutioned - they too have families back home that struggle like the rest –

So God Bless Hollywood - America can live for ever like a Dicksonian novel.

But when the next war comes, and along with it a Draft, for ourselves and our children, - we will be expected not to question or reason, just fight and die without ever knowing why.

still have an Integrity, character, ethics have gone the way of the slide rule.

im moe green
August 4, 2010 at 9:53 pm

Which K street lobbying firm do you work for? You sound familiar, did you used to work for Dodd and now one of the K street firms?

Pat Walker
August 4, 2010 at 10:21 pm
Dear Green,

If you are being facetious, I'm not laughing.

I'm currently unemployed, without week 1 of benefits since I was paid on a private contractor basis.

As far as Dodd, he's an old time pol - lots of kabuki, the mountain labored and didn't even give birth to a mouse --

K Street lobbyists, may not be the first, but certainly inline with each one having a personalized lamp post waiting for them.

Any other inquiries ?

August 4, 2010 at 11:31 pm
Jeeezz. I think you missed the cynicism entirely.

As cynicism is truth, I think it's safe to say that any cynicism expressed in public would never be uttered by a veteran (K street) lobbyist or from anyone in an important leadership position actually. The "troops" (whoever they happen to be at the moment) ALWAYS need the fakery of optimism to allow for the greater glory of the nobility benefitting from their glorious sacrifices.

im moe green
August 4, 2010 at 9:56 pm
There are and have been honest politicians, goverments and business men. Honest is not quaint–its brave and difficult. Corruption is easy….
Pat Walker
August 4, 2010 at 10:34 pm
Dear Moe,

There is a fine distinction between honest and naive.

Perhaps there have been honest individuals - history books are full of them.

In a relatively open, "honest" society, corruption is difficult at best with the most onerous consequences.

In our current society, the corruption is so brazen, it's out in the open with no one giving a good God Damn - easy as pie; - Old but true - just follow the money

Where do you fit ?

As far as brave, Brave is for heroes - the stuff of idyl dreamers, newbies who don't no better, postumhous medals, VA hospitals, and cemetaries - and for what ? –

im moe green
August 4, 2010 at 10:40 pm
Indeed sorry to hear you are out of work. Yes, it is now quixotic to be brave or principled in a true sense. Certainly compliance with the "values" and rules of the state and powerful are the only way…..Where do I fit? Old fart, used to be economist, developer and lobbyist, I was part of the problem and then checked out so to speak, sick of the people I worked with, dealt with and ashamed of my self….
Pat Walker
August 4, 2010 at 11:17 pm
Dear Moe,

In my world, "Old Fart" is synonymous with 1. Experienced, 2. Mature, 3. Wisdom.

Since the beginning of time, the majority of the world is full of sheep that follow or pigs that feed at the common trough - the people you worked with fit one of those categories.

Since you are no longer part of the problem, by extension, you must be part of the solution.

Feeling ashamed of something past is pointless. We live in the here and now.

History is full of courageous individuals who made a difference.

Thank you for your response,

August 4, 2010 at 11:39 pm
Re: Honest is not quaint–its brave and difficult.

It's also overrated, which is why it's so rare. If it was common the liars who write the history books wouldn't need to work so hard to find examples of it.

Winning (and business and war) is about screwing somebody. The workers, management, customers, & stockholders are better off when each realizes the only motive of the others is to maximize their wealth. Life is about the smart amoral scumbags screwing the dumbasses for fun and profit. History is allot more understandable when view in this light.

Moral: Honesty is very seldom the best policy when dealing with the smarter people.

August 4, 2010 at 10:09 pm
There is an irony here. Taleb, who tends to be favourably oriented towards free markets and is a big fan of Hayek has often made arguments about how regulators are necessary and has stated that the libertarian position, which would eliminate most of the government functions with the exception of protecting individuals from force or fraud, was too extreme. Blinder's actions are an example of why the libertarians are right and why being a 'moderate' on the issue of economic or social liberty is a path towards serfdom.
August 4, 2010 at 10:56 pm
Yes, in your confused little mind you may dream up whatever conclusions you want.
August 4, 2010 at 10:42 pm
So it takes Taleb turning on Blinder to validate what everyone with 100k already knew and adjusted to, a decade ago? We could all bundle our deposits with our dumbest broker.

I am shocked!! but reassured that the reporting of the crimes will be at least a decade delayed. Greenspan and Blinder might not be around to face their accusers.

Jay Hee
August 5, 2010 at 1:09 am
I remember in the Eighties and early Nineties when the US were accusing Japan of so many unfair and wrongful practices and one of which was the idea of senior government officials joining the private sector. It was called 'amakudari' meaning descending from heaven, as in these officials would use their influence and knowledge in public service to serve their own ends as well as for the companies they joined.

Surely the USA is no different now? In my 50s now I realised people should be slower to accuse each other especially Asians of wrongful practices when they too have their own backyards to watch. Yes I am an Asian working in Asia.

August 5, 2010 at 1:30 am
Mr. Jay Hee,

Thank you for your comments. Not only is the USA not only "no different", I'm certain it is much worse, given that there are no protections here for consumers whatsoever. Falling from grace here means finding more ways to fleece the poor without the government saying a word…in fact, BECAUSE of these former government employees they(the government) actually encourage behavior that further enriches those corporations. Taleb's encounter with Blinder is just one small case among many larger cases.

Chris of Stumptown
August 5, 2010 at 2:04 am
So Taleb isn't complaining that regulation has exploitable gaps. No, the problem is someone is talking about the regulatory gaps. Pardon me if I demur and am not impressed with his critique.
August 5, 2010 at 2:36 am
You are not excused to demur about anything of the sort. If you want to talk about exploitable gaps there is a plethora of information out there, so much that the regular news media is able to report on it daily.

Taleb's argument is linked to regulatory capture…if you knew how much worse capture is than "exploitable gaps" then you wouldn't be making your silly comment to begin with.

Francois T
August 5, 2010 at 2:22 am
Barry Ritholz pointed out a while ago that 1,400 lobbyists working for the financial industry were ex-congresspersons and Hill staffers.

Think about that for a minute and tell me how much sleaze, corruption and law-rigging you could get with an army like that.

August 5, 2010 at 3:13 am
In other words, at least 1,400 'franchises' built on complex information, a multitude of variables, and (as Taleb points out) many 'nonlinear' relationships that make the system easy to game.

If public service were more highly valued, it would be better paid and the entries would become more rigorous (in some places, they already are). It appears that Singapore took the potential of 'human capital' more seriously than the Obama administration has done.

After 30 years of anti-government ranting in the US, we've lost sight of the enormous value that a viable, non-corrupt, respected, well paid civil service can bring to an economy.

Self-interest, unenlightened, has led to the situation in which we have 1,400 'franchisees' on FinReg alone.

S Brennan
August 5, 2010 at 2:55 am
Nice piece Yves,

Thank You!

August 5, 2010 at 3:47 am
Yves says: "The famed regulatory revolving door, and all the benefits that former officials and their new private sector masters gain from a legally permitted but socially destructive form of trading of insider know how is now considered business as usual in the US."

Sorry, this does not hold water. There is no "insider know how" at work here. The FDIC itself makes it clear in its brochures (pick one up at your bank) that it's perfectly OK to have multiple insured deposits at multiple banks. It even gives specific examples to make sure people understand how to do it. Nothing unethical here. The limits per depositor per bank exist to make sure the government's insurance risk is spread around to multiple banks. That's all there is to it. And many people have been doing this for a long time, without being insiders, and it's both legal and ethical.

BTW - Blinder worked in the Clinton administration, and is a pro-stimulus liberal professor of economics. Taleb is anti-stimulus and, in general, on the conservative side especially with respect to deficits.

Yves Smith
August 5, 2010 at 4:00 am
You are missing the point. The wealthy person who obtains the service does not set up multiple accounts, he has a single account. He is spared the operational hassle, which is a disincentive to having multiple accounts. The usual low risk alternative for someone who wants low hassle and no risk would be a Treasury money market fund, which involves no taxpayer support (FDIC deposit insurance is underpriced; Treasury has repeatedly had to provide support to the FDIC).

Read up on the IndyMac bankruptcy. Many of the depositors who were suffered losses by having over $100,000 at IndyMac were businesses. If you have a business with any meaningful payroll, it is pretty much impossible NOT to have an account with over $100,000 in it for more than a few days a month. Things have probably changed since then, but at that time, the software used to manage payroll processing could work only with single accounts (as in it would have been prohibitively costly to split a business account used for payroll among multiple banks).

Was the Blinder service marketed to high transaction volume customers like businesses, who really could not follow the FDIC's suggestion? Could they even have used that service (ie, did it have monthly transaction limits that would have made it unworkable for the businesses that would really have needed it?) I don't know the answer, but I suspect not.

August 5, 2010 at 4:27 am
I am aware of what this business (and other similar "brokered deposit" businesses) offers. And I still say that putting together a business like this requires no "insider knowhow". Furthermore, for this to be unethical, you would have to show that the rationale for the per bank FDIC limits was to make it difficult for depositors to use multiple banks. I believe that this is a wrong assumption - rather, the government simply wanted to spread the insurance risk to multiple banks. FDIC goes out of its way, in its literature (and on its website), to make sure everyone knows about the multiple bank option. FDIC insures banks, not individuals. They just don't want the risk to be concentrated.

And by the way, do you really believe that Mr. Taleb has all his Black Swan money in a single bank account? (I'm guessing he knows a lot better how to "insure" his own portfolio, using methods and real insider knowhow that the average Joe cannot come close to). And it's always possible for any large investor to buy treasury bills in any amount - so what's the big deal here?

August 5, 2010 at 4:05 am
What shocks me about this is how dumb Blinder must think Taleb is. Having a financial broker diversify your cash into accounts, each with less than 100k, is an obvious trick. It's also old – I had a Merrill Lynch account which could do this back in the 80s, although sadly it never did me any good, because I never had enough money. I guess it's not the supposed corruption of the elite which worries me; it's more their stupidity.
August 5, 2010 at 4:33 am
Is a mutual fund, then, also an "obvious trick"? Because, you know, it also diversifies your cash by splitting it among multiple investments. In fact, even your bank, to pay you interest on your deposits, makes multiple loans and diversifies its portfolio.
Yves Smith
August 5, 2010 at 4:46 am
With all due respect, did you read my comment above? FDIC guaranteed accounts are NOT equivalent to money market mutual funds. Revere broke the buck, remember, and Treasury only MM funds offer lower yields.

And as I indicated, FDIC deposit insurance is underpriced, so taxpayers subsidize deposits. That is not the case with mutual funds (ex the few months post the run on Revere which led them to be guaranteed, but even then only up to $250K)

August 5, 2010 at 4:59 am
The comment on mutual funds was made in response to the statement "Having a financial broker diversify your cash into accounts, each with less than 100k, is an obvious trick." As it stands, this comment implied that diversifying cash into multiple investments is a trick. In any case, I think you understand that this is not the main point being argued here. What is the reason for the FDIC limits? To spread institutional risk or to limit aggregate per person coverage? And does the government want the rich to reduce their bank deposits and buy treasury bills? ;

[Aug 04, 2010] The Road to Serfdom Is Lawlessness: Inside Goldman Sachs

[Aug 04, 2010] Hey Rube, Here's Why Your Lawmakers Ignored All Those Calls and Faxes

Jesse's Café Américain

"The financial industry has spent $251 million on lobbying so far this year as lawmakers hammered out new rules of the road for Wall Street, according to the latest lobbying reports compiled by a watchdog group."

Money Talks. And money in the hands of the man who is sitting in the offices and standing in the halls of Congress is an effective tool for buying the influence and the laws that you want.

Political campaign financing reform, including stricter limitation of direct contributions by special interests to targeted lawmakers, is at the heart of it.

Does the First Amendment cover soft bribery? That is how they will spin it.

Goldman Sachs has the right to express its opinion to your congressman, while wrapping it in a thick rolls of hundred dollar bills, charged to expenses, and paid for by you.

And while it is a nice cushion, $251 million is small potatoes compared to the real payoff in jobs and speaking engagements with huge stipends, consulting fees, and sinecures after leaving office. And that is on top of their fat pensions and cadillac benefits.

Corporatism is the parternship of big business and government. And in the organizational state, the individual (that's you Mr. Potato Head) is irrelevant. Except for comic relief, someone to be played for the fool, the emotional plaything of paid pundits and party politics. Someone whom they can whip into a frenzy, who really enjoys the show.

Yeah boy, we'll show those new crooks a thing or two, and vote the old crooks back in November. Especially the ones that make no bones about being in it for the money and the power, and appeal to the worst in us with stereotypes and caricatures. That will teach Washington something about us.

You bet it will.

Wall Street's lobbying pricetag: $251 million
By Jennifer Liberto
August 2, 2010: 2:08 PM ET

WASHINGTON ( -- The financial industry has spent $251 million on lobbying so far this year as lawmakers hammered out new rules of the road for Wall Street, according to the latest lobbying reports compiled by a watchdog group.

The financial sector spent more than any other special interest group from April through the end of June -- a whopping $126 million, according to the Center for Responsive Politics' latest estimates. Wall Street banks, as well as insurance and real estate firms, hiked the amount they spent on lobbying by 12% in the second quarter compared to the same period last year.

"Financial reform certainly drove Wall Street lobbying efforts," said Dave Levinthal, spokesman for the Center for Responsive Politics. "Even as the economy remains beaten and bruised, with some financial institutions continuing to struggle, most banks and securities houses found it in their budgets to hire lobbyists - and lots of them."

In the first half of 2010, Goldman Sachs spent $2.7 million, just $100,000 shy of the total the firm spent on lobbying in all of 2009. The firm's reports to the federal government said it lobbied Treasury, White House and the Commodity Futures Trading Commission, as well as Congress...

There was plenty of evidence of financial sector lobbying throughout in the period leading up to final passage of the Wall Street reform bill last month.

In June, during the final 20-hour meeting of the panel to reconcile differences between the House and Senate reform bills, lobbyists suddenly packed a congressional office meeting room a bit after midnight, as lawmakers started tackling the final details of making derivatives more transparent. In hallways, they cornered House members who serve on the Agriculture Committee, in particular.

In late May, JPMorgan Chase chief executive Jamie Dimon made calls to a couple of lawmakers who were expected to be named to the conference panel.JP Morgan Chase spent $3 million on lobbying in the first half of the year, about the same as in 2009, according to the Center.

While the financial sector was active, other industries also dug deep into their wallets to talk to lawmakers. Despite the fact that the health care bill passed in March, the Center said health firms spent nearly as much as Wall Street firms did in the second quarter, $125 million. So far this year, the health care industry has spent $267 million on lobbying.

Overall, all lobbying totaled $1.78 billion in the first half of the year, up 7.5% in from the same six months in 2009. If it continues at that pace, 2010 will be a record year for lobbying, according to the Center for Responsive Politics.

However, fewer lobbyists are pounding the pavement, as the number of lobbyists dropped 5% compared to the same period in 2009.
Posted by Jesse at 9:48 AM

[Jul 23, 2010] Three of every four oil and gas lobbyists worked for federal government

July 22, 2010 | Drumbeat

Three out of every four lobbyists who represent oil and gas companies previously worked in the federal government, a proportion that far exceeds the usual revolving-door standards on Capitol Hill, a Washington Post analysis shows.

Key lobbying hires include 18 former members of Congress and dozens of former presidential appointees. For other senior management positions, the industry employs two former directors of the Minerals Management Service, the since-renamed agency that regulates the industry, and several top officials from the Bush White House. Federal inspectors once assigned to monitor oil drilling in the Gulf of Mexico have landed jobs with the companies they regulated.

[Jun 07, 2010] Surowiecki The Regulation Crisis

Economist's View

James Surowiecki argues, correctly I think, that one of the key factors in effective regulation is the societal attitude about the value of what regulators do:

The Regulation Crisis, by James Surowiecki: A few weeks after B.P.'s Deepwater Horizon oil rig blew up and crude started spewing into the Gulf, Ken Salazar, the Secretary of the Interior, ordered the breakup of the Minerals Management Service-the agency ... supposedly in charge of offshore drilling. It was a well-deserved death: during the past decade, M.M.S. officials had let oil companies shortchange the government on oil-lease payments, accepted gifts from industry representatives, and, in some cases, literally slept with the people they were regulating. When the industry protested against proposed new regulations (including rules that might have prevented the B.P. blowout), M.M.S. backed down. ...
M.M.S.'s bad behavior was unusually egregious, but it's hard to think of a recent disaster ... that wasn't abetted by inept regulation. Mining regulators... Financial regulators... The S.E.C... These failures weren't accidents. They were the all too predictable result of the deregulationary fervor that has gripped Washington in recent years, pushing the message that most regulation is unnecessary... The result is that agencies have often been led by people skeptical of their own duties. ...
The obvious problems of graft and the revolving door between government and industry, in other words, were really symptoms of a more fundamental pathology: regulation itself became delegitimatized... This view was exacerbated by the way regulation works... Too many regulators, for instance, are political appointees, instead of civil servants. This erodes the kind of institutional identity that helps create esprit de corps, and often leads to politics trumping policy. Congress, meanwhile, often takes a famine-or-feast attitude toward funding, allocating less money when times are good and reinflating regulatory budgets after the inevitable disaster occurs. ... This ... also contributes to the sense that regulation is something it's O.K. to skimp on. ...
[T]he history of regulation both here and abroad suggests that how we think about regulators, and how they think of themselves, has a profound impact on the work they do. ... So reforming the system isn't about writing a host of new rules; it's about elevating the status of regulation and regulators. More money wouldn't hurt: as ... George Stigler and Gary Becker point out, paying regulators competitive salaries ... would attract talent and reduce the temptations of corruption. It would also send a message about the value of what regulators do. That's important... If we want our regulators to do better, we have to embrace a simple idea: regulation isn't an obstacle to thriving free markets; it's a vital part of them.

[Apr 24, 2010] ; Regulations Alone Are Never Enough, But Here's How They Can Easily Be Made Pointless

Mr. Obama's speech at the Cooper Union today was remarkably unsatisfying. It seemed to be given from weakness, and almost obsequious as the American President politely asked his largest campaign contributors to please stop flouting the law, defrauding the people and their customers, and spending millions per day lobbying the Congress to buy changes in the reform legislation to provide them with the 'right regulators' of their choice and convenient loopholes to render it ineffective.

The reform making its way through the Congress is unlikely to be effective given the process in place, despite the political kabuki dance being conducted by the Congress and the Banks.

The solution is to put simple and effective regulations in the hand of stronger, independent, ad highly capable regulators to bear on the financial services industry, and to understand that the regulations must evolve with a dynamicly evolving business. The idea that you can erect some impregnable and unchanging Maginot line against bank fraud is laughable, a farce.

As William K. Black disclosed in his testimony the other day, the regulators always had the power to shut down the frauds, and to resolve the financial crisis without having to give away billions. They lacked the will, and the motivation.

You want to wipe that smirk off Lloyd Blankfein's face? Nominate Eliot Spitzer or Elizabeth Warren to be the head of the SEC, or the CFTC, and provide them with a adequate budget and a staff of financial experts and a few experienced prosectors.

Even with strong regulations, unless you have capable and motivated regulators, there are always ways to evade the rules, especially if they are complex and provide exceptions. The simpler they are, the stronger the regulations will be, provided they are flexible enough to be amended and expanded efficiently to match the changing and dynamic nature of the industry that they are overseeing.

This is not that difficult, and these jokers are not that smart, although part of their con is to paint themselves as the smartest, the best, and practically unstoppable.

The root of the US financial crisis is always and everywhere regulatory capture, political cronyism, and fraud. It really is that simple.

Barack Obama should to listen to a speech by Nick Clegg of the UK Liberal Democratic Party to hear what a genuine reformer sounds like. Today he sounded like a servant, but not for the public.

Meet the New Goldman Sachs Derivatives Business

By David Callaway
April 22, 2010

"...So the version making its way to the Senate floor Wednesday included a host of exemptions for non-bank companies who use derivatives to hedge against quick movements in prices for resources they need. These include airlines, manufacturers, other trading corporations, and pension funds - entities like Enron, for example, or the Orange County, Ca., retirement fund - two infamous financial wizards.

So firms like Goldman, Morgan Stanley, or J.P. Morgan Chase Co. would be able to register as other entities - airlines, manufacturers, pension consultants -- and continue to trade derivatives to their hearts content.

Sounds silly, until you realize that's just what Goldman and a number of other banks did almost two decades ago to enable them to trade widely in commodities index futures. In 1981, Goldman got itself classified as a "hedger," such as a farmer or food producer, so it could trade commodities without fear of limits put on pure speculators.

Part of the fallout from that was the disastrous run-up in food and commodities prices we saw in 2009, caused by speculators, which finally forced the Commodities Futures Trading Commission to take a look at these special exemptions. See story on Goldman futures trading exemptions.

This is where the battle over the derivatives bill lies in the next several days, and where Wall Street will concentrate its efforts. The more exemptions granted; the larger the loopholes and trading opportunities. These are not stupid people, by the way.

Another provision would require the $60 trillion foreign exchange swaps industry to be overseen by the CFTC, which is the same regulator that earlier this week was considering whether traders could make markets in Hollywood movie futures, but neither of those ideas will fly - especially in foreign currency markets.

To make its derivatives regulation work, and have teeth, Congress and the Obama Administration must resist all exemptions on derivatives trading. They must instead focus on forging a global alliance in the G-20 this weekend in Washington to stand behind the creation of a transparent market in derivatives trading through clearing houses and exchanges.

Doing this would lead to cheaper trading for customers and make it easier for global regulators to supervise the creation of new products. Importantly, it would also allow the big banks to continue to participate in what is in fact a very lucrative and vital business for the global economy, not just to hedgers, but to those seeking loans to rebuild their companies, industries, or countries. Like it or not, banks are the primary lenders and they need to be allowed to do business.

Whether this in fact will happen in Washington, or whether Congress will once again descend into a chaos of partisan bickering and blind and reactionary rule making, is anybody's guess. Goldman is almost certainly betting on both outcomes.

[Apr 18, 2010] Bill Moyers Crocodile Tears on Wall Street

With all due respect, we can only wish those Tea Party activists who gathered in Washington and other cities this week weren't so single-minded about just who's responsible for all their troubles, real and imagined. They're up in arms, so to speak, against Big Government, especially the Obama administration.

If they thought this through, they'd be joining forces with other grassroots Americans who in the coming weeks will be demonstrating in Washington and other cities against High Finance, taking on Wall Street and the country's biggest banks.

The original Tea Party, remember, wasn't directed just against the British redcoats. Colonial patriots also took aim at the East India Company. That was the joint-stock enterprise originally chartered by the first Queen Elizabeth. Over the years, the government granted them special rights and privileges, which the owners turned into a monopoly over trade, including tea.

It may seem a bit of a stretch from tea to credit default swaps, but the principle is the same: when enormous private wealth goes unchecked, regular folks get hurt -- badly. That's what happened in 2008 when the monied interests led us up the garden path to the great collapse.

So the Tea Party crowd should be demanding accountability from Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Wells Fargo, and scores of hedge funds and private equity firms that constitute what we loosely call Wall Street.

But are the culprits taking responsibility for devastating the lives of millions of ordinary Americans? Don't kid yourself. If you've been watching them appear before congressional committees and the Financial Crisis Inquiry Commission - the independent inquiry that's supposed to find out what really happened - you've no doubt been reaching for the Pepto-Bismol.

Here's Robert Rubin, former Treasury Secretary and director of Citigroup, testifying last week. "Almost all of us involved in the financial system, including financial firms, regulators, ratings agencies, analysts and commentators missed the powerful combination of forces at work and the serious possibility of a massive crisis," he said. "We all bear responsibility for not recognizing this, and I deeply regret that."

Okay, maybe you didn't have a crystal ball. But what about good, old-fashioned business sense? How could you make so much money and not know the score? "You are talking about a level of granularity no board will ever have," Rubin claimed. Citi paid you $120 million as a senior advisor and rainmaker and you're not responsible for knowing what's happening below you? You didn't bother to assess the risk you were peddling to clients?

The committee heard a similar alibi from Chuck Prince, who served as CEO of Citigroup during its meltdown: "Let me start by saying I'm sorry. I'm sorry that the financial crisis has had such a devastating impact on our country... And I'm sorry that our management team, starting with me, like so many others, could not see the unprecedented market collapse that lay before us."

Commission Chairman Phil Angelides, the former state treasurer of California, wasn't buying it. "The two of you, in charge of this organization, did not seem to have a grip on what was happening," he said, and to Rubin, "I don't know that you can have it two ways: you were either pulling the levers or asleep at the switch."

Nonetheless, the financiers wail, it was all an enormous accident, a once in a century calamity, an act of God. But of course that's not true. Lots of people saw it coming and made a bundle, taking off with the loot at the expense of the millions who lost their jobs, homes and savings. There's no longer any question that many bankers continued to game the system after the collapse - still paying themselves exorbitant salaries and bonuses while hitting everyday people with usurious same day paycheck loans, credit card fees and other charges -- and refusing to help small and medium-sized businesses that could be creating employment.

The Tea Party gang really should have dropped by those Senate hearings this week looking into the failure of Washington Mutual, the bank that went belly up during the meltdown in September 2008 -- the largest such failure in American history.

As an 18-month Senate investigation revealed, WaMu made subprime loans that its executives knew were rotten, then packaged them as mortgage securities and pawned them off on unsuspecting investors. Loan officers were paid by the number of mortgages they sold, and ran up the numbers by lying to customers and falsifying data so they could make bigger bucks and win trips to Maui and the Caribbean. At one Washington Mutual office in Montebello, California, 83 percent of the housing loans contained bogus information.

Then there's Lehman Brothers. Their misfortune, apart from some chicanery only now coming to light, was being small enough to fail. During those black September days two years ago, the Feds decided it was expendable and let it go, leading to America's biggest bankruptcy ever. In an admirable job of journalism this week, The New York Times reported that Lehman secretly controlled a company called Hudson Castle. Critics say it was used by Lehman to borrow money and to hide bad investments in commercial real estate and subprime mortgages.

But the week's award for sheer gall goes to a Chicago area hedge fund called Magnetar, named after a kind of neutron star that spews deadly radiation across the galaxies. Thanks to the teamwork of the investigative reporting website ProPublica, as well as public radio's Planet Money project and "This American Life," we learned that Magnetar worked with Citigroup, JPMorgan Chase, Merrill Lynch and other investment banks to create toxic CDO's -- collateralized debt obligations -- securities backed by subprime mortgages that management knew were bad. Then Magnetar took that knowledge and bet against the very same investments they had recommended to buyers, selling short and making a fortune.

To simply call all of this "creative accounting" is to do it an injustice. This is corruption, cynicism and greed on a scale that would make the Roman Emperor Caligula cringe. Or rather, the Emperor Nero. He didn't just poison the citizens of Rome; legend has it that he burned the place down, fiddling around in the ashes, just like our Wall Street tycoons.

But since we know all this, why is it so hard to hold Wall Street accountable? Which brings us to what the Tea Party people should have been complaining about this week. The banking industry and corporate America are fighting against proposed financial reform with all the money and influence at their disposal, attempting to preserve a system that would enable them to ransack the country once again.

Look at Eric Lichtblau's report this week, also in The New York Times, under the headline: "Lawmakers Regulate Banks, Then Flock to Them." The financial services industry has hired more than 125 former members of Congress and congressional staffers from both parties to help them fight off accountability.

No wonder, too, that this headline appeared in the Times this week: "GOP Takes Aim at Plans to Curb Finance Industry." That's not surprising. Earlier this year Republican politicians told Wall Street: Give us the scratch and we'll scrap reform.

The GOP's SWAT team -- also known as the United States Chamber of Commerce -- has already spent three million dollars to try to kill or cripple a key part of reform -- the proposed new Consumer Financial Protection Agency. With the Chamber as their front, corporations have bankrolled ads that make it seem like the Red Army is at our doorsteps.

Advocates for reform have countered with ads of their own, but Democrats are deeply in hock to Wall Street, too. Remember the hedge fund Magnetar that bet against its own products? The owners covered their bets with ample campaign contributions to Rahm Emanuel. Yep, the same -- President Obama's White House chief of staff. At the time he was an Illinois congressman and chair of the Democratic Congressional Campaign Committee, which collected millions of dollars from the financial services industry.

In fact, the website reports that "the nation's ten richest hedge fund managers have dumped nearly one million dollars into campaign accounts over the past several years... consumer advocates and critics from other financial sectors say hedge funds would get off pretty easily" under the Senate reform bill.

Bottom line: "The Wall Street banks are the new American oligarchy -- a group that gains political power because of its economic power, and then uses that political power for its own benefit." So write Simon Johnson, former chief economist at the International Monetary Fund; and James Kwak, former management consultant and software entrepreneur, in their important new book, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.

Their words of warning and the past year and a half make you realize that as usual, Thomas Jefferson, whose birthday we celebrate this week, had it right. Back in 1816, he wrote, "I sincerely believe... that banking establishments are more dangerous than standing armies."

[Apr 15, 2010] ; ; WaMu Examiner Ridiculed, Called "Housing 'bubble' boy" by CalculatedRisk

Apr 5, 2010 | CalculatedRisk

From Jim Puzzanghera at the LA Times: Regulators did little to halt reckless practices at WaMu

Federal banking examiners found serious problems at Washington Mutual Bank at least five years before its 2008 collapse, but their supervisors showed little concern ... During those five years, examiners constantly warned of "less than satisfactory" loan underwriting, the "horrible performance" of its subprime-backed mortgage securities and the failure of WaMu executives and federal regulatory supervisors to do much about it.

One examiner said he was derided by colleagues as "the housing 'bubble' boy" for his "gloom and doom" predictions for some risky loans, and another complained that critics of subprime loans were called "chicken little."
Former OTS Director John Reich, who served from 2005 to 2009, referred to WaMu Chief Executive Kerry Killinger as "my largest constituent" in a 2007 e-mail.

That attitude pervaded the upper levels of the agency ...

Once again the field examiners did their job, but their efforts were ridiculed. I was asked by a reporter a couple of years ago who was to blame for the housing bubble, and I said the list is long, but it starts with the regulators ...

[Apr 15, 2010] Guest Post: "Never Even a Whisper" at Fed's Open Market Committee Meetings

naked capitalism && Washington's Blog

Ben Bernanke, William Dudley and Donald L Kohn are on the Fed's Open Market Committee (FOMC).

They are also on the board of directors of the Bank for International Settlements (BIS) – often called the "central banks' central bank". And Kohn is an alternate director for BIS.

Alan Greenspan, of course, was a BIS director for many years.

Dudley is also chairman of BIS' Committee on Payment and Settlement Systems. (Tim Geithner – previously on the FOMC – previously held that post).

So there is clearly quite a bit of overlap between the two groups.

In addition, BIS' chief economist – William White – and others within BIS – repeatedly warned the Federal Reserve and other central banks that they were setting the world economy up for a fall by blowing bubbles and then using "using gimmicks and palliatives" which "will only make things worse".

As Spiegel wrote last July:

White and his team of experts observed the real estate bubble developing in the United States. They criticized the increasingly impenetrable securitization business, vehemently pointed out the perils of risky loans and provided evidence of the lack of credibility of the rating agencies. In their view, the reason for the lack of restraint in the financial markets was that there was simply too much cheap money available on the market…

As far back as 2003, White implored central bankers to rethink their strategies, noting that instability in the financial markets had triggered inflation, the "villain" in the global economy…

In the restrained world of central bankers, it would have been difficult for White to express himself more clearly…

It was probably the biggest failure of the world's central bankers since the founding of the BIS in 1930. They knew everything and did nothing. Their gigantic machinery of analysis kept spitting out new scenarios of doom, but they might as well have been transmitted directly into space…In their report, the BIS experts derisively described the techniques of rating agencies like Moody's and Standard & Poor's as "relatively crude" and noted that "some caution is in order in relation to the reliability of the results."…

In January 2005, the BIS's Committee on the Global Financial System sounded the alarm once again, noting that the risks associated with structured financial products were not being "fully appreciated by market participants." Extreme market events, the experts argued, could "have unanticipated systemic consequences."

They also cautioned against putting too much faith in the rating agencies, which suffered from a fatal flaw. Because the rating agencies were being paid by the companies they rated, the committee argued, there was a risk that they might rate some companies too highly and be reluctant to lower the ratings of others that should have been downgraded.

These comments show that the central bankers knew exactly what was going on, a full two-and-a-half years before the big bang. All the ingredients of the looming disaster had been neatly laid out on the table in front of them: defective rating agencies, loans repackaged to the point of being unrecognizable, dubious practices of American mortgage lenders, the risks of low-interest policies. But no action was taken. Meanwhile, the Fed continued to raise interest rates in nothing more than tiny increments…

The Fed chairman was not even impressed by a letter the Mortgage Insurance Companies of America (MICA), a trade association of US mortgage providers, sent to the Fed on Sept. 23, 2005. In the letter, MICA warned that it was "very concerned" about some of the risky lending practices being applied in the US real estate market. The experts even speculated that the Fed might be operating on the basis of incorrect data. Despite a sharp increase in mortgages being approved for low-income borrowers, most banks were reporting to the Fed that they had not lowered their lending standards. According to a study MICA cited entitled "This Powder Keg Is Going to Blow," there was no secondary market for these "nuclear mortgages."…

William White and his Basel team were dumbstruck. The central bankers were simply ignoring their warnings. Didn't they understand what they were being told? Or was it that they simply didn't want to understand?

Yet, White said (h/t Edward Harrison) in a short, must-see talk last week that former long-time St. Louis Fed president William Poole told him that there was never even a whisper of these basic concepts at a single FOMC meeting.

Indeed, White says that – even today - the Federal Reserve is doing the same old thing, reading off of the same playbook that caused the Latin American crisis, the Asian meltdown, the Long Term Capital meltdown, and all of the other financial crises of the last couple of decades. And see this.

White, of course, argues for more accurate models which take into account real-world factors such as debt stocks, and include a time-frame longer than 2-year inflation targets or 4-year election cycles.

But as Simon Johnson has repeatedly pointed out, economics used to acknowledge that politics had an important affect on economic policy, but now the economics profession – as a whole – tries to pretend that it is strictly a mathematical and technical art form.

And as I documented last October, economists are trained to ignore – and central bankers and regulators rewarded to the extent that they ignore – the real world.

And we cannot improve our models and understandings of how to prevent another crisis unless the truth of what caused this crisis is openly discussed (under subpoena power); and see this). If the government's entire strategy remains to cover up the truth, then we won't have the chance.

[Apr 14, 2010] ; ; Kirsten Grind Blogging the WaMu Hearing

4/13/2010 | CalculatedRisk

Kirsten Grind at the Puget Sound Business Journal is blogging from the WaMu hearing. How about this quote?

"My opinion is the OTS examiner in charge during the period of time I was there did an excellent job of finding and raising issues. Likewise, I found good performance from the FDIC examiner in charge. What I can't explain is why the superior in the agencies didn't take a tougher tone with banks, given the degree of negative findings. My experience with the OTS and OCC (Office of Comptroller of the Currency, another federal bank regulator) was completely different, so there seemed to be a tolerance there or political influence of senior management of those agencies that prevented them from taking more active stances - I mean, putting banks under letters of agreement and forcing change."
James Vanasek, who was the former chief risk and credit officer of WaMu from 1999 to 2005
We have seen this over and over. Every time the inspector general's office issues a report on a failed bank, the field examiners had correctly identified the problems - usually going back to 2003 or so - but no further action was taken.

Vanasek is arguing this was possibly because of "political influence of senior management of those agencies" - the political appointees in charge. I've heard the same thing from examiners.

;Juvenal Delinquent:

In American party, apparatchiks are the life of it.


Vanasek is arguing this was possibly because of "political influence of senior management of those agencies" - the political appointees in charge. I've heard the same thing from examiners.

Vanasek was the chief risk and credit officer. It was his job, first and foremost, to hold the management of his own firm accountable for responsible lending.

He has no credibility as a witness, so why did they even call him?

some investor guy :

I found this chart interesting, FDIC: QBP Graph Book Click on Non current rates on loans secured by 1-4 family residential properties.

In Dec 09, it shows about 10% of first mortgages in default. However, it shows second mortgages with under 3% in default, and HELOCs with under 2% in default.

Any ideas how this could be happening? 1. Homes with seconds or HELOCs had better underwriting? OK, stop laughing. 2. The lenders on the seconds and helocs have some different incentives about reporting defaults? 3. Somebody made a mess of the data, or did the wrong calculations?



Anyone notice that a Mish blog got mentioned in the Wamu exhibits? Page 438 of 666.


rich, and he retired in 2005. But I think his comment is interesting ... and this hasn't been pursued although the appointees blocking regulation was a key failure..

Jesse's Café Américain

"Giving sophisticated models and fast computers to traders is like giving handguns and tequila to teenage boys. Only complete mayhem can result (and as we saw recently, complete mayhem did result)."
Here is a piece I found interesting from a quant who left Goldman Sachs. It matches what I have seen first hand over the years doing business with the brokers and exchanges, and from friends who joined other high energy Wall Street firms including Lehman and Bear Stearns and Morgan Stanley.

The investment banks and brokers are an adolescent culture, high on macho and low on expansiveness in thinking to put it politely.

I do not have a problem with that, per se. I enjoyed hanging with most of these guys, their odd sense of irreverent cynicism and gallows humour, and the grab-asstic frat life style. It is fun, if you do not take it too seriously. I used to follow an annual race on the stairs among brokers in a large NY skyscraper with interest, a friend phoning in the results. Big money was bet on it. It's a good time, and a means of relieving the tremendous pressures of a high stress profession.

The difficulty is that over the past ten years the financial sector, including the once staid commercial banks, has been absolutely overwhelmed by the hedge fund and investment banking mentality, and that power in turn has been influencing serious policy discussions in Washington to the detriment of the nation, because money is power. Most of it had to do with deregulation.

Banks must keep up with their competitors, and if one does it, they all must do it to stay in business. That is why regulation is so vital in this highly competitive sector. One cannot be virtuous as a commercial entity with obligations to shareholders and customers under brothel rules.

Goldman Sachs is primarily a big hedge fund with a lot of political clout and an inside line with the Fed. They have a trading, hedge fund culture these days. It was not always like this. At one time a firm's reputation and their word was everything in a system founded on confidence. With a trading culture it's all about the bottom line, with profit as virtue, and deceit in the name of profit is no vice. You do not wish to have fellows with this mindset running any substantial part of your country.

Quite a bit of that came with their change in status from a predatory trader to mainstream bank in name only, with a predator's instincts and reward system. And this multiplied their potentially negative impact and influence on the entire financial system.

Even worse, their self-centered and short term thinking and clever manipulation of the rules has become the tail wagging the big dog of the country, because the political climate in Washington, and elsewhere, has been largely corrupted by money. And in a bubble economy, the financial centers are where the money is.

Wall Street is like the Gauls (or the Ferengi for the sci-fi fans), ruthlessly obvious and lacking in subtlety, wallowing in the raw and often ostentatious use of amoral power for gain. Washington, on the other hand, tends to effete decadence and studied pretense, the sly and subtle subornation of character and too often the law in the service of power. The mix of these two cultures is an antichrist on the rocks, a deadly cocktail indeed.

I had the opportunity to work with several congressional and even presidential campaigns and administrations starting with Nixon. I don't claim to be an insider, but I have seen a side of things that is transparent to most. I liked that culture as well. I used to go to Washington for the State of the Union message each year, to meet old acquaintances from the Staffs for drinks and chat at Bullfeathers or The Palm to catch up on things, while the big dogs were attending the show. You get the best view of things from the servants, especially if you are benign, an interested non-player.

The deterioration in Washington is evident. These men are not the brightest stars in the firmament, and at times they are downright ignorant of things we might take for granted because they often live a rarefied existence with access to people and information managed by staffs. That is a necessity because they are drinking from a firehose of information.

Their chief ability seems to be to know what to say and to whom, what levers to pull to get something done, making deals, gaining and trading power, and how to get elected. They are great at networking. But this leaves them terribly vulnerable to influence, and group think, and brother, inside the Beltway these days it is all about lawyers, guns (power) and money.

There has always been an element of this, but over the past twenty years, with the whole deregulatory movement, it has become supersized, like a feeding frenzy. I have had the opportunity to discuss this with some older friends in the business and they tend to agree that things have changed.

There are always creepy and seriously warped people who are attracted to the halls of power. I have met a few who were simply chilling. More common are the broken people, with drugs and drink and sex filling the holes in their being, hollowed out by the power and fame that lured them in. But these were always the exceptions.

In government there always had been an element of service to the country and a kind of dignity underpinning the system, a kind of shared camaraderie, that seems to have been tossed in a ditch of expediency and greed, and the lust for power on a mass scale.

What had been the exception is now the rule, at least beneath the urbane, often pietistic, veneer. You can still be tossed out of office in the government for doing things that would still make you a legend on Wall Street.

When the politicos were doing something wrong back then at least they knew it, and they were ashamed of it, despite the usual bluff and bravado. A stiff conversation with a federal prosecutor would make a Congressional staffer's blood run cold. Now it is more like business as usual, and even getting caught is not all that bad, given the current trend to bipartisan professional courtesy, mavericks excepted.

Greed is indeed the greatest good, the fatal flaw behind the decline of the 'me generation.'

The law, that much maligned government of regulations and restraints, abused and fallible as it may sometimes be, is the bulwark of society, and often the only thing standing between the people and packs of ravening wolves.

Those who would tear down the law in some misguided pursuit of reform, or of an adolescent anarchy or utopia of 'no rules' at all, might find it hard to stand when the cold winds of avarice and tyranny of power blow across the land, with no laws to stop or restrain them. The madness serves none, consuming all.

"Equal protection" under the law is the best safeguard that the average person enjoys. Remove the law and you remove the protection, and it is every man for himself, and the individual is irrelevant.

This is why the Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery. And underpinning all of this is the integrity of the regulatory and law enforcement process, and a serious pass at campaign finance reform and limitation of the power of large corporations and organizations to buy influence with other people's money.

The story of the 21st century will be the struggle of the individual versus the organization, the machine controlled by the elite few. A cyclical theme no doubt, but the powerful few seem to become more efficient in their promotion of tyranny on each iteration.

Why founding a three-person startup with zero revenue is better than working for Goldman Sachs
By Antonio
23 Jul, 2010

I joined Goldman Sachs in 2005, after five flailing years in a physics Ph.D. program at Berkeley.

The average salary at Goldman Sachs in 2005 was $521,000, and that's counting each and every trader, salesperson, investment banker, secretary, mail boy, shoe shine, and window cleaner on the payroll. In 2006, it was more like $633,000.

In the summer of 2005, I took one look at my offer letter and the Goldman Sachs logo above it, another look at my sordid grad student pad, and I got on a plane to New York within the week. I packed my copy of Liar's Poker for reference.

My job on arrival? I was a pricing quant on the Goldman Sachs corporate credit trading desk1. We traded credit-default swaps, both distressed and investment-grade credit, and in the bizarre trading experiment assigned to me, the equity part of the corporate capital structure as well.

There were other characters in this drama. The sales guys were complete tools, with a total IQ, summing over all of them, still safely in the double digits. The traders were crafty and quick-witted, but technically unsophisticated and with the attention span of an ADHD kid hopped up on meth and Jolly Ranchers. And the quants (strategists in Goldman speak)? Mostly failed scientists (like me) who had sold out to the man and suddenly found themselves, after making it through two years of graduate quantum mechanics, with a bat-wielding gorilla peering over their shoulder (that would be the trader) asking them where their risk report was.

Wall Street is inward-looking and all-consuming. There exists nothing beyond the money game, and nothing that can't be quantified into dollars and cents...

New Obama Administration Propaganda Tactic: Revisionist History

Obama's burning desire to join oligarchy might be on of the reasons of why his adminitration is completly captured by financial interests...
May 25, 2010

Wow, the Obama Administration is less than a year and a half old, and it's already twiddling with the record. I was gobsmacked to see this section in a post by Felix Salmon today, on a new book by Jonathan Alter and a New York Magazine cover story by John Heilemann:

Both Alter and Heilemann trace the decision not to nationalize to a dinner at the White House in April 2009, attended by Paul Krugman, Joe Stiglitz, Alan Blinder, Ken Rogoff, and, at least according to Heilemann, Jeff Sachs as well. Krugman and Stiglitz were in favor of nationalization, but we open about the fact that it would be an expensive and fraught course of action; Obama, faced with an alternative, sensibly took it.

Huh? This is a complete and utter fabrication. And Felix gives Alter and Heilemann a free pass for deciding to take dictation from Team Obama rather than do basic reality-checking?

It was obvious LONG before April that the Administration had NO interest in nationalizing financial firms; Geithner made that clear as of his very first policy statement on the financial services industry as new Treasury Secretary. Merely searching my archives, I find:

"Geithner Plan Smackdown Wrap." February 10, 2009:

As we, and increasingly others, have said, the Obama economic team is every bit as captive to Wall Street's interests as the Bushies were. The differences increasingly look stylistic, not substantive…

Thus Geithner's belief that government can't manage assets is sheer projection of his own inability to deliver. The FDIC winds up banks all the time. During the S&L crisis, as William Black reminds us, FSLIC appointed receivership managers that later research determined did reduce losses. Sweden, Norway, and Chile all nationalized (and relatively quickly reprivatized) dud banks during their financial crises. This isn't like trying to go the moon (which was a government initiative, lest we forget). There are plenty of models and lots of good proposals. What is lacking is will. History says that an aggressive, take-out-the-dead-banks program is the fastest and all-in cheapest way out of a financial crisis. But if you believe that something will not work, as Geithner does, it isn't at all hard to produce that outcome.

The Administration's full bore effort to talk up confidence in general and banks in particular as of March made it impossible.

"White House Says Banks Should Stay Private," February 20, 2009:

Amid fears that Citigroup Inc. and Bank of America Corp. could be on the verge of being nationalized, the White House gave assurances that it prefers banks to remain out of the government's hands.

"This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government," White House spokesman Robert Gibbs said Friday. "That's been our belief for quite some time, and we continue to have that."

We provided a longer-form analysis this year, in "The Empire Continues to Strike Back: Team Obama Propaganda Campaign Reaches Fever Pitch." Some extracts:

The widespread, vocal opposition to the TARP was evidence that a once complacent populace had been roused. Reform, if proposed with energy and confidence, wasn't a risk; not only was it badly needed, it was just what voters wanted.

But incoming president Obama failed to act. Whether he failed to see the opportunity, didn't understand it, or was simply not interested is moot. Rather than bring vested banking interests to heel, the Obama administration instead chose to reconstitute, as much as possible, the very same industry whose reckless pursuit of profit had thrown the world economy off the cliff. There would be no Nixon goes to China moment from the architects of the policies that created the crisis, namely Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke, and Director of the National Economic Council Larry Summers….

Obama's repudiation of his campaign promise of change, by turning his back on meaningful reform of the financial services industry, in turn locked his Administration into a course of action. The new administration would have no choice other that working fist in glove with the banksters, supporting and amplifying their own, well established, propaganda efforts.

Thus Obama's incentives are to come up with "solutions" that paper over problems, avoid meaningful conflict with the industry, minimize complaints, and restore the old practice of using leverage and investment gains to cover up stagnation in worker incomes. Potemkin reforms dovetail with the financial service industry's goal of forestalling any measures that would interfere with its looting. So the only problem with this picture was how to fool the now-impoverished public into thinking a program of Mussolini-style corporatism represented progress.

How did the Administration and financial services message control teams work together?

The first was the refusal to consider investigations of any kind. Obama is widely reported to have studied the early days of Franklin Delano Roosevelt's administration for inspiration; it would be impossible for him to miss the dramatic steps FDR took, including supporting the continuation of a Senate Banking Committee investigation into the misdeeds of the Roaring Twenties, the Pecora Commission….

More compelling evidence of the Administration's lack of interest in reining in the money-changers came via Treasury Secretary Timothy Geithner's first presentation on his reform plan, which was more accurately a plan to have a plan. It was widely criticized for its sketchiness, but most observers missed the true significance. Had the Obama transition team done any serious thinking about the financial crisis? Obviously not, because you don't need to think too hard if the game plan is to go back to business as usual to the extent possible. Geither's presentation came nearly three weeks after Obama was sworn in, and all its initiatives were Bush/Paulson wine in new bottles: a new go at the failed idea of having the government overpay for bad bank assets; "stress tests" to put more discipline around the process of handing out TARP funds to the needy; and a mortgage modification program which pretended to be able to square the circle of saving borrowers without taking on investors in mortgage securitizations.

Geithner's not-much-of-a-plan exemplified the second tool in the Obama campaign to sell doing as little as possible to the financiers: the Theory of Positive Thinking….

Back to our current post. I also checked my assessment with Newsweek's Washington DC based commentator Michael Hirsh, who confirms that the decisions not to nationalize banks had been taken long before April, and the dinner with Stiglitz, Krugman, et al was "pro forma and largely meaningless." Hirsh, by the way, broke the story of that dinner.

Separately, it is also utterly implausible that Obama would place much weight on a decision of this magnitude on a single session with individuals outside his team. Large and at least adequately managed organizations (and the Obama crew prides itself on being buttoned down) aspire to have a deliberate, analytical approach to Big Decisions. And given how high profile this issue was, having a solid, defensible-sounding rationale would be even more important.

So why would Team Obama go to the lengths of telling a verifiably false account to at least two reporters? Perhaps events in due course will reveal why they are so eager to revise the timeline, but all I can fathom now is that for some reason the Administration is trying to make it appear that the decision not to nationalize (or to use our current Newspeak, resolve) the really sick banks was:

a. Made by Obama, as opposed a matter that either didn't interest him or one in which he deferred to Summers, Geithner & Co.

b. One that a majority of famous economists endorsed.

I'm open to other theories as to why Team Obama is going to such extremes to change the record.

Richard Kline:

We are now within the event horizon of the mid-term election cycle. Much of the populace think 'Obama hasn't done the right thing about the banks.' This is the roll-out to show that: a) he went with the advice of 'the best minds,' b) the advice was correct, and c) 'it's worked.' This is what American politics has become, lies, stacked on misstatements, all balanced for maximum spin.

Obama is a person without substance, and rapidly becoming one without integrity as well, if he ever had any.

I'm not going to fact-check on all this, but it is my distinct recollection that Obama signaled _during his transition team weeks_ before inauguration that there would be no nationalizations. I don't recall who said what or exact quotes, but I recall this as being quite unequivocal. -But if that is the accurate time frame for the signals of him and his team, that's a problem now given the scenario I outlined in the first paragraphy. You see, it's necessary to show, now that his handling of the banks is very unpopular, that this WAS SOMEONE ELSE'S (GOOD) IDEA, i.e. that he's not really responsible for it but should get the credit anyway.

Yeah, _that's_ Barack Obama's First Law of Leadership: "I just work here."

Independent Accountant:

I see this as Obama taking us to 1984. "Who controls the past controls the future. Who controls the present controls the past". The Obamites will say anything to make Him look good. I believe this administration will make its predecessor look good.

Imagine, by 2012 people will lament Jimmy Carter's "third term".


I can't get the NYT site to download at the moment or I'd get the link, but just a few days ago on his blog even Krugman (gently) said Geithner was lying about how K had allegedly said it would cost "trillions".

I guess the purpose of this lie offensive is to claim that there was no alternative to embracing the Bush Bailout and turning it into the Obama/Bush Bailout which wouldn't have been far more expensive. That's doubly a lie, of course, since nothing could be more expensive than embarking upon the permanent Bailout (but their version continues with the lie, TARP = Bailout), while in the long run it would've been far less expensive and painful for the people (as opposed to for the criminals) to let the rotten criminal system go down, while government did whatever it had to do to bolster Main Street. We still need a New Deal level jobs program, for example, even though we know this kleptocracy would sooner machine gun the unemployed than than use public money to create jobs for them instead of handing it over to rich banksters as private loot.

As for Obama's own pathology, he's clearly a corporatist by ideology. A corporatist ideologue believes the purpose of civilization itself is to best package public property to privatize it at the greatest profit to private corporations, and to best organize human labor so that it serves as the most profitable resource mine for these corporations. That's why his policy preference in each and every case (it looks knee-jerk) is to route any and every process through a corporate toll-booth. Thus even his scam "jobs bill" has to go via the route of tax credits for employers, not direct public job creation, which would of course be vastly less expensive and more effective.

But if you made this last point to him, he'd sincerely not understand what you're talking about. If the main purpose of something isn't more rents for private interests, then he doesn't see it as having any purpose at all.

He's also a status quo elitist and bully by personality. He believes in the Rand lie about capitalist supermen. His heroes really are the likes of Blankfein and Dimon, and he really believes they're America's best human type. Meanwhile he may deplore the uncouth aspects of the Republicans, but he still respects them as rivals and peers.

His bullying hatred comes through in his disdain for the diminishing ranks of actual progressives. Them he's willing to "fight", meaning to kick down upon. He's happy to send out his thug Rahm to yell and swear at them. That's both because they're weak, and as a bully Obama sneers at perceived weakness, but also because they actually wanted to change the status quo, which in O's eyes is tantamount to metaphysical rebellion.

(In Obama's defense, the "progressives", to the extent they still cling to their delusions about him and the Democratic party, really do deserve all the scorn and contempt heaped upon them. Their position is untenable, but out of cowardice they refuse to accept that.).

Selected Comments


Why read Salmon? He's voice of Goldman Sachs.

aet :

Just like the days of the ol' Soviet Union: Why read Pravda?

Because knowing which lies are important at the moment may help to gain understanding of what transpires in the shadows, and behind the scenes.

To see behind the scenes, one must fist recognize what IS merely "scenery": placed to conceal, or to distract, or to enhance an illusion.

Treasury, NY Fed Backed AIG In Feud With Pay Czar New York Times Magazine

During the height of the tense negotiations over executive compensation led by pay czar Kenneth Feinberg in recent months, Wall Street had an unexpected ally: the Treasury Department and the New York Federal Reserve, according to Steven Brill's new cover story in the upcoming New York Times Magazine.

After top executives at AIG refused to give back their controversial "retention payments" (read: bonuses) and insisted on all-cash pay packages, Feinberg dug in, insisting that they needed to share risk with the company's shareholders. Among the execs was CFO David Herzog, who threatened to leave the firm if he didn't get to keep his $1.5 million bonus.

"No one at A.I.G. seemed to be embarrassed to argue that the chief financial officer of Wall Street's Titanic was irreplaceable," writes Brill.

(One tantalizing tidbit that serves as the best example of AIG's tone-deafness, the firm spent $3 million -- most of which ultimately came from taxpayers -- on two compensation consultants and two Wall Street firms to file their compensation proposal to Feinberg. Among the expenditures: paying a consulting firm $500,000 to prepare a 167-page PowerPoint presentation.)

Riding to AIG's rescue were Treasury officials, including assistant secretary for financial stability Herb Allison, who met daily with Feinberg and pressed him to not require pay packages in stock.

And the New York Fed, where Treasury Secretary Tim Geithner previously was president, was even more supportive of AIG and other Wall Street giants, reports the Times. As an example of their close ties, Brill notes that the law firm advising Citigroup and General Motors in the compensation negotiations -- Davis Polk and Wardwell -- also worked for the NY Fed on TARP matters, charging from $305 to $1,055 per hour.

As reported by HuffPost earlier this month, AIG employees still haven't paid back in full the $45 million in bonuses they promised to return last spring in the wake of public outrage.

Yesterday, the Wall Street Journal reported that AIG's outgoing counsel would be paid several million dollars in severance after she resigned over Feinberg's mandated curbs on her compensation.


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