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Regulatory Capture Bulletin, 2011

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[Nov 14, 2011] Totally Corrupt America by PAUL CRAIG ROBERTS

The Mechanism was probably more compiles as housing bubble emerged in different countries with different regulatory regimes and financial sector traditions....

Last March I reviewed Matt Taibbi's important book Griftopia, an entertaining account of the through-going financial fraud that gave us the financial crisis. Taibbi shows that the US "superpower" can match any third world backwater in the magnitude of greed and fraud that is endemic in business and government. Taibbi's Griftopia was published last year. This year Henry Holt publishers have provided us with Gretchen Morgenson and Joshua Rosner's Reckless Endangerment.

Morgenson and Rosner tell the story again, but with less drama and provocation. Possibly, it might be more acceptable to those gullible Americans who wrap themselves in the flag and refuse to believe that their country could ever knowingly do anything that is wrong.

I am not suggesting that Morgenson and Rosner pull their punches. To the contrary, the authors deliver enough knockouts to be contenders with Taibbi as world champions in exposing the reckless fraud that the US financial sector and its regulators now epitomize.

The financial crisis, which is very much still with us, did not result from accident or miscalculation; neither did it result because of a flaw in Alan Greenspan's theory, as he told Congress when a feeble effort was made to hold him accountable. It was the intentional result of people motivated by short-term profits who wanted to get theirs and get out.

As Reckless Endangerment shows, fraud characterized every stage of the process from the fraudulent borrower incomes and credit scores that mortgage issuers gave to unqualified buyers, through the securitization of the mortgages and their triple-A investment grade ratings by the rating agencies (Standard & Poor's especially, but also Moody's and Fitch) to the investment banks that sold what the banks knew was junk to investors around the world as investment grade securities. Indeed, Goldman Sachs was simultaneously betting against the mortgage derivatives that it was selling to clients.

Investment banks, such as Goldman Sachs, which once considered it a matter of honor to represent the interests of customers, took advantage of the trust that had been built up in the past to commit fraud against customers in order to advance the banks' short-term profits and the out-sized multi-million dollar managerial bonuses that these fraudulent profits produced.

Morgenson and Rosner provide a number of unique accounts of how those benefitting from fraud were able to defeat laws that were passed that would have held them to account. For example, the state of Georgia passed perfect legislation that held predatory lending to account. William J. Brennan Jr. and Georgia Governor Roy E. Barnes got the Georgia Fair Lending Act through the state legislature. It was a model for other states. As the federal regulators had thrown in the towel, the state laws would have prevent the worst part of the financial crisis, it not prevented the crisis altogether.

The Georgia law only lasted a few months, because the rating agencies saw that their enormous profits from issuing fraudulent investment grade ratings were threatened by the law. The corrupt rating agencies mischaracterized the consumer protection act as a jihad by regulators. Standard & Poor's declared that it would no longer allow Georgia mortgages to be placed in mortgage securities that it rated.

In other words, Georgia mortgages could no longer be securitized. This announcement banned Georgia mortgage lenders from securitization. Thus, the law was overturned, and fraud ran wild.

These kind of mafia strong-armed tactics in order to protect at all costs the short-term mega-bonuses that drove the totally fraudulent system have never been held accountable or punished. Totally innocent people are held indefinitely and tortured by the US government for no other reason than to convince the gullible public that they are endangered by terrorists, but those who wiped out the home ownership and retirement pensions of millions of Americans now hold high and honorable positions on corporate boards and US regulatory agencies.

Federal regulatory agencies totally failed. Brooksley Born tried to use her statutory authority to regulate over-the-counter derivatives, but she was blocked by the Federal Reserve chairman, the US Treasure secretary, and the SEC chairman and forced to resign. As University of Chicago Nobel economist George Stigler predicted, regulatory agencies are captured by those who are intended to be regulated. This was the case.

Regulators turned a blind eye to obvious criminal fraud, and were rewarded with lucrative positions in the financial community. The same for the US senators and representatives who repealed Glass-Steagal and other financial regulations.

For example, former US senator Phil Gramm who spearheaded the repeal of the Glass-Steagall Act, which separated commercial from investment banking, the repeal of which set up the financial crisis, was rewarded by being made vice chairman of the mega-bank UBS, a Swiss global financial services company.

What Taibbi, Morgenson and Rosner make clear is that while monster criminals continue to collect their multi-million dollar annual incomes, depressed single mothers, deserted by the men who fathered their child, are sent to prison for having small quantities of illegal drugs to boost their depressed spirits, and their children are put out to adoption.

This is "justice" in America where there is "freedom and democracy."

Paul Craig Roberts was an editor of the Wall Street Journal and an Assistant Secretary of the U.S. Treasury. His latest book, HOW THE ECONOMY WAS LOST, has just been published by CounterPunch/AK Press. He can be reached at:

[Nov 11, 2011] Congress Members Took Part in Insider Trading Abramoff

"That gap between the law and the reality has made Capitol Hill a virtual free-fire zone for insider trading."
Yahoo! Finance

As many as a dozen members of Congress and their aides took part in insider trading based on foreknowledge of market moving information on Capitol Hill, disgraced Washington lobbyist Jack Abramoff told CNBC in an interview.

Abramoff, who was once one of the wealthiest and most powerful lobbyists in Washington before a corruption scandal sent him to federal prison for more than three years, said that many of those members of Congress bragged to him about their stock trading prowess while dining at the exclusive restaurant he owned on Pennsylvania Avenue.

But Abramoff, whose black trench coat and fedora became one of the most notorious images in recent Washington history after his fall from grace, said he didn't play the stock market himself - he considered it an inherently unfair "casino" in which the house had far more information than the players. Abramoff made most of his fortune representing - and, as it turned out, duping - Native American tribes rich with cash from casino operations.

The former lobbyist said the amounts members of Congress earned trading off their inside knowledge ranged from as little as $2,000 to, as much as "several hundred thousand dollars," that was claimed by one member of Congress.

Abramoff declined to name the members of Congress.

"It was more, 'Look at me, I'm a real great stock trader,'" Abramoff told CNBC of the congressional bragging. "All of a sudden somebody from a background maybe in law, maybe in some other unrelated business area, all of a sudden is picking winners and losers in the market."

At the time, Abramoff, who was involved in an extensive corruption ring, didn't think much of it. But after years in prison to reflect on the culture of corruption in Washington, Abramoff says he thinks trading based on inside Congressional knowledge is wrong.

"These people should not be using whatever information they gain as public servants to benefit themselves, any more than they should be taking bribes," he said.

Generally, however, legal analysts say that Wall Street insider trading laws do not apply to Congress. As an open and public institution, the legal assumption has long been that any member of the public can have access to information about how Congress works. In practice, though, that's simply not true, as powerful members of Congress come into contact daily with market-moving tidbits. That gap between the law and the reality has made Capitol Hill a virtual free-fire zone for insider trading. Over the years, academic studies have found that members of the House of Representatives beat the market by as much as six percent per year and members of the Senate do even better than that.

And Abramoff says everybody on the inside knew it. "I think it was pretty widely known and it is pretty widely known that it is going on," he said.

Abramoff has been making the rounds, speaking with the media this week, to promote his new book, "Capitol Punishment: The Hard Truth About Washington Corruption From America's Most Notorious Lobbyist," which went on sale Monday.

Abramoff said that the most valuable type of information for Congressional insider trading is held by congressional investigators who pry deeply into corporate goings on. A particularly easy target is advance knowledge of the announcement of an investigative hearing into a company.

"Hearings under almost every circumstance are going to have a bad impact on a company," Abramoff said. "And so some staffers I've seen in the past talking about the fact that, 'Oh, I'm gonna go out and short that company.'"

But the man who spread millions around the nation's capital said he didn't like to invest his own money in the stock market. "I'd never really played the stock market," he said. "I viewed it as a big gamble because of the fact you don't have all the information you need. The casino has all the information, and you don't."

[Oct 20, 2011] Citigroup Deal to Go to Judge Critical of S.E.C. Practices by PETER LATTMAN

October 20, 2011 |

Judge Jed S. Rakoff has taken the S.E.C. to task for resolving cases without making defendants admit wrongdoing.It is boilerplate language found in nearly every settlement with the Securities and Exchange Commission: A company settles its case "without admitting or denying" wrongdoing.

There it was again in the S.E.C.'s announcement on Wednesday that Citigroup had agreed to pay $285 million to settle a civil complaint that it had defrauded investors in a mortgage securities deal. The bank did so "without admitting or denying" the government's accusations.

But the S.E.C.'s longstanding policy of using this phrase in its settlements is likely to come under scrutiny by the federal judge who must approve the Citigroup settlement - and it could, legal experts say, cause the deal to come undone.

That is because the judge presiding over the S.E.C.'s action against Citigroup is Judge Jed S. Rakoff of Federal District Court in Manhattan, a jurist whom many consider the agency's bęte noire.

"Given his recent jurisprudence, if anyone's going to rattle the S.E.C.'s cage on this issue, it's Judge Rakoff," said Michael Koehler, a professor of business law at Butler University who has written about the S.E.C.'s settlement practices.

Judge Rakoff is known for a scathing ruling in September 2009, when he rejected a proposed $33 million settlement between the agency and Bank of America over its acquisition of Merrill Lynch. The judge called it a sweetheart deal for the bank that had been done "at the expense, not only of the shareholders, but also of the truth." (He later grudgingly approved a $150 million settlement.)

More broadly, Judge Rakoff has sharply criticized the agency's practice of resolving cases without forcing the defendant to admit any wrongdoing. In a little-noticed ruling in March, he raised the specter of scuttling the next S.E.C. settlement in his courtroom that included such language.

Judge Rakoff said the use of the "without admitting or denying wrongdoing" language created "a stew of confusion and hypocrisy unworthy of such a proud agency as the S.E.C."

By using the boilerplate phrase, "only one thing is left certain: the public will never know whether the S.E.C.'s charges are true, at least not in a way that they can take as established by these proceedings," he wrote.

Judge Rakoff's disapproval of the agency's settlement practices came in an accounting fraud case against the technology company Vitesse Semiconductor and two of its former executives.

He ultimately approved the Vitesse settlement, finding it fair and reasonable, but not before criticizing the commission on a number of fronts. He chafed at the S.E.C.'s lack of explanation for why he should approve the settlement and described the agency as treating the court as a "rubber stamp."

But much of his opinion was aimed at the "neither confirm nor deny the allegations" phrase, which he called "troubling."

Judge Rakoff looked back at the history of the practice and found that the S.E.C. had permitted defendants to settle without admitting wrongdoing because that made obtaining settlements much easier. And defendants preferred it, he noted, because if they were forced to acknowledge their bad behavior, private plaintiffs would pile on with civil actions seeking monetary damages far greater than anything regulators were likely to impose. Then, in the 1970s, the S.E.C. began prohibiting defendants who settled from publicly denying the accusations. That was intended to prevent them from engaging in public relations campaigns to contend that they had settled only to avoid protracted litigation.

Those historical reasons were met with scorn by the judge. "The defendant is free to proclaim that he has never remotely admitted the terrible wrongs alleged by the S.E.C.; but, by gosh, he had better be careful not to deny them, either," the judge wrote.

He suggested that permitting the defendant to neither admit nor deny the misconduct was indefensible.

"An agency of the United States is saying, in effect, 'Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it,' " he said.

Such strong language is the norm for Judge Rakoff, one of the more colorful judges on the federal bench in Manhattan. Judge Rakoff, 68, is a former federal prosecutor who also spent years as a criminal defense lawyer before he was named to the bench. He is currently presiding over a number of major cases, including several of the insider trading prosecutions and a dispute between the trustee for the victims of Bernard L. Madoff's fraud and the owners of the New York Mets baseball team.

Judge Rakoff is not alone in his discomfort over the "neither confirm nor deny" language. The Justice Department has long not permitted defendants, except in the most unusual circumstances, to plead guilty to a crime without admitting or denying the charges.

William F. Galvin, the top financial regulator in Massachusetts, has also been a critic of the "neither admit nor deny" language and has forced companies that settle to admit they engaged in unlawful conduct.

And at least one top agency official has expressed concern. In a speech earlier this year, Luis A. Aguilar, an S.E.C. commissioner, worried that defendants who settled with the agency were issuing press releases after settlements that amounted to "revisionist history." If this continued, he said, "it may be worth revisiting the commission's practice."

[Oct 19, 2011] GAO Finds Serious Conflicts at the Fed - Newsroom- Bernie Sanders - U.S. Senator for Vermont

A new audit of the Federal Reserve released Wednesday detailed widespread conflicts of interest involving directors of its regional banks. "The most powerful entity in the United States is riddled with conflicts of interest," Sen. Bernie Sanders said after reviewing the Government Accountability Office report.

The study required by a Sanders Amendment to last year's Wall Street reform law examined Fed practices never before subjected to such independent, expert scrutiny. "This is exactly the kind of outrageous behavior by the big banks and Wall Street that is infuriating so many Americans," Sanders said.

Sanders said he will work with leading economists to develop legislation to restructure the Fed and bar the banking industry from picking Fed directors.

The corporate affiliations of Fed directors from such banking and industry giants as General Electric, JP Morgan Chase, and Lehman Brothers pose "reputational risks" to the Federal Reserve System, the report said. Giving the banking industry the power to both elect and serve as Fed directors creates "an appearance of a conflict of interest," the report added.

The 108-page report found that at least 18 specific current and former Fed board members were affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis.

1 currency now -yogi :

"Here is what the GAO found:

Paul Volcker Do The Right Economic Thing

March 31, 2010 | The Baseline Scenario


'Wake up, gentlemen'

"I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth - one shred of evidence," said Mr Volcker, who ran the Fed from 1979 to 1987 and is now chairman of President Obama's Economic Recovery Advisory Board.

He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: "Is that a reflection of your financial innovation, or just a reflection of what you're paid?"

Paul Volcker – Dec 2009

Hillbilly Darrell

It's too late, and all just smoke and mirrors, and propoganda at this point. The rules of the game of American capitalism were permanently and irreperably destroyed when the decisions (Bush AND Obama)were made to bailout and resurrect the TBTF banks post mortem, and the corresponding refusal of the (Bush and Obama) administrations to impliment the legally mandated Prompt Corrective Action resolution authority that has been on the books and has existed since the Savings and Loan debacle of the 1980s. It's that simple. And, I am unaware of anyone successfully demonstrating the ability to "un-ring" a bell.


Most likely, the administration is waiting and watching how foreign governments are handling their too big to fail problem. Governments now want an overall approach. Will it do any good to restrain and breakup US banks and allow foreign banks to come in with their larger size and overwhelm our financial system.


Volcker's talk got almost no press.

I didn't anything on CNBC and Bloomberg showed him speaking – with no sound – while they interviewed a guy from Keefe Bruyette who described the industries preferred alternative: capital controls (as managed by the Fed, no doubt). Note: they would have TBTF banks keep higher reserves.

It really seems to me that a sober, intellectual debate is a losing approach. Its clear that the industry understands that some kind of reform is inevitable, but they want to shape that reform so that: provisions are weak, and administration of the "reforms" falls under institutions that have their best interest at heart and/or they can influence.

Unless the debate is raised to one of concentrated power and taken to the people, REAL financial reform is a dead issue. (PS I think 13 bankers is great - but will J6P will read it?) The financial reform that is in the cards will be comprised of things like Fed-determined capital controls, and a consumer protection agency that falls under the Fed and whose mission is secondary to the Fed's current mission - especially "safety and soundness."

Why do the banks demand that consumer protection is secondary to safety and soundness, and how is that related to TBTF?

1) Current policy is to allow the banks to bilk us all to pay for the financial mess. Not allowing them to do so would threaten their bonuses . . . um . . . I mean safety and soundness.

2) That same policy is likely to be applied when a bank gets into trouble in the future. The Fed will help TBTF banks avoid the resolution process as much as possible – even at the expense of consumers.

Using their customers as a financial resource when a bank is stressed could rightly be termed the "Consumer Soft Put (CSP)". The larger the bank, the greater is the CSP. CSP relies on # of customers and industry concentration (pricing power).

NOTE: One can easily imagine the Fed being lobbied in the future to include the "real option" of the CSP as a form of secondary capital for satisfying the increased capital requirement for TBTF banks.


Robert Reich makes a great point, if this administration were serious about financial reform it would direct the SEC to prosecute bank executives under Sarbanes-Oxley.

Instead we get blah blah blah blah blah blah blah.


I am so tired of all the accolades for Paul "Big Deal" Volcker. I am convinced the bankrupt situation we find ourselves in today had its origins with this man. Here we have the first of many central bankers of the day to figure out you could actually pay a nation's debt by simply printing money. What a brilliant concept. And what has this created? An unemployed, foreclosed upon and bankrupt society so strung out on debt it no longer can offer a measly single digit interest rate for a passbook savings account without fear of collapsing today's fragile, propped up housing, stock, and automobile market.

Christ free Agnes, this capitalistic crony was instrumental in devaluing US currency in 1971 after closing the foreign gold window. And you can see where that has got us. A buck is worth .74 cents in Europe. Ever ask yourself why they keep this guy around. Think it might be for another round of devaluation then?

Per Kurowski

Simon Johnson: "The financial sector does not add anywhere near as much social value as its proponents claim."

Of course not, how could it be, when the regulators never discuss the purpose of the financial sector and only favor what is perceived as having low default risk.

I went to the UN to argue for the developing countries but I later realized that my arguments were just as valid for the developed world.

[Oct 03, 2011] Paul Volcker: Do The Right Economic Thing

By Simon Johnson

A great deal of the popular anger directed at big banks is completely legitimate, as put nicely by John Cassidy at the end of his interview with Treasury Secretary Tim Geithner,

"The hardest part of his job, Geithner often says, is getting people to comprehend the inner logic of a financial-rescue operation, and the unpopular actions it entails. In fact, his problem may be not economic illiteracy but its opposite: Americans understand all too well what has happened. Financial crises have a way of revealing aspects of our economic system that otherwise remain obscured, such as the symbiotic relationship between Wall Street and Washington, the hidden subsidies that financial firms sometimes receive from the Fed and other government agencies, and the fact that the vast profits that firms like JPMorgan Chase and Goldman generate depend in part on an implicit guarantee from the taxpayer. When ordinary Americans are confronted with these realities, they get angry."

Paul Volcker is also angry.

Of course, Paul Volcker expresses himself in the measured language of a distinguished technocrat. But he is very worried about our current financial structure and where it is heading. Speaking today at the Peterson Institute in Washington DC, Mr. Volcker made two broad points (Marketwatch coverage) – both of which we also emphasize in 13 Bankers.

1. The financial sector does not add anywhere near as much social value as its proponents claim.

"The question that really jumps out for me is, given all that data, whether the enormous gains in the financial sector - in compensation and profits - reflect the relative contributions that sector has made to the growth of human welfare" (from NYT story)

2. Too big to fail banks are alive and well – and this poses a major problem to our future prosperity.

"There is an expectation that very large and complicated financial institutions will not be allowed to fail," he said. "Unless that conviction is shaken, the natural result is that risk-taking will be encouraged and in fact subsidized beyond reasonable limits."

The message yesterday and from other statements made by Mr. Volcker is clear. Our biggest banks are out of control and will not be reined in by the measures currently on the table. We need a much stronger approach to big banks – an approach that will strip government-backed banks of their ability to take crazy risks and, most likely, an approach that significantly constrains (and hopefully even reduces) their size.

Feb 21, 2011] SEC Expert on Why It is a Wuss at Litigation

naked capitalism


at 4:23 am SEC lawyers have a strong incentive to win cases, as it builds their resume, but it is far easier to win cases by way of settlements on minor charges, than by way of judgments on major charges, for obvious reasons, namely that the charged parties are much more likely to cooperate in the former case than in the latter.

Yes, major cases that set precedent are fantastic…..

The commonly held perception expressed by readers on your blog as elsewhere–that SEC staff have an incentive to go soft on industry in order to land cushy jobs–is not entirely fiction, but is much less widespread than outside observers believe.

But the phony enforcement described above doesn't build any reality-based resume. Any reasonable person would scoff at it, as for example Yves always does here. So if it's not true that this "resume" is meant to be sent to the corporate complex on the other side of the revolving door, then where is it supposed to be sent?

That could actually be true, particularly since the game plan here over the last 30 years seems to have been to make government less competent as a justification for shrinking it further.

I wish you wouldn't repeat the lie that anyone has "shrunk" government or ever intended to. Government, as a bipartisan project, only gets bigger and more aggressive. But it gets bigger and more aggressive on behalf of the corporations and the rich and against the people. Only the good civics, ostensibly public interest part of government is being destroyed.

One of the two glaring parallels between this regime and the Ancien Regime is how government is incompetent or negligent at doing anything worthwhile but overbearing in its worthless, pointless assertions of power, so that more and more people experience it as nothing but pointless oppression. The Food Tyranny bill just passed threatens a radical escalation of this worthless oppression. (And then there's the looming insurance Stamp mandate.)

Anyone who feels oppressed, cramped, bottlenecked is realizing that the reason for this is a worthless but oppressive government, including the worthless extensions of government known as corporations. These government entities also do nothing but impose ever more taxes and regulations while providing ever fewer and worse services.

Conscience of a conservative
at 5:47 am The email listed sounds a lot more on the money than the conspiracy theories, but I can't help think the writer left one thing out. The SEC does not get the budget it needs to persue all cases to their full conclusion. AS the former insider says, these cases take a great deal of time and money and the outcome is not guaranteed. If the SEC was properly funded it would be in a better position to retain their talent and fund legal battles instead of always settling.
at 7:39 am "SEC lawyers have a strong incentive to win cases"

Really? How does that assessment square with Judge Rakoff's observations during S.E.C. v. BAC over the SEC's proposed settlement for BAC's fraudulent concealment of MER bonuses prior to the shareholder vote on the BAC-MER merger? A sampling…

"In other words, the parties were proposing that the management of Bank of America-having allegedly hidden from the Bank's shareholders that as much as $5.8 billion of their money would be given as bonuses to the executives of Merrill who had run that company nearly into bankruptcy-would now settle the legal consequences of their lying by paying the S.E.C. $33 million more of their shareholders' money.",15

"The S.E.C., while also conceding that its normal policy in such situations is to go after the company executives who were responsible for the lie, rather than innocent shareholders, says it cannot do so here because "[t]he uncontroverted evidence in the investigative record is that lawyers for Bank of America and Merrill drafted the documents at issue and made the relevant decisions concerning disclosure of the bonuses." Id. But if that is the case, why are the penalties not then sought from the lawyers? And why, in any event, does that justify imposing penalties on the victims of the lie, the shareholders?"


"Overall, indeed, the parties' submissions, when carefully read, leave the distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C. with the facade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry-all at the expense of the sole alleged victims, the shareholders. Even under the most deferential review, this proposed Consent Judgment cannot remotely be called fair."


"The S.E.C. also claims it was stymied in determining individual liability because the Bank's executives said the lawyers made all the decisions but the Bank refused to waive attorney-client privilege. But it appears that the S.E.C. never seriously pursued whether this constituted a waiver of the privilege, let alone whether it fit within the crime/fraud exception to the privilege. And even on its face, such testimony would seem to invite investigating the lawyers. The Bank, for its part, claims that it has not relied on a defense of advice of counsel and so no waiver has occurred. But, as noted earlier, the Bank has failed to provide its own particularized version of how the proxies came to be and how the key decisions as to what to include or exclude were made, so its claim of not relying on an advice of counsel is simply an evasion." Id. n.3.

Judge Rakoff makes the S.E.C. lawyers sound like a bunch of pussy cats, not people who want to win.

Wild Bill
at 8:17 am "The commonly held perception expressed by readers on your blog as elsewhere–that SEC staff have an incentive to go soft on industry in order to land cushy jobs–is not entirely fiction, but is much less widespread than outside observers believe." We're not wrong! We know what we see! We know what's going on! Linda Thompson was hired because she knew the game, not because she litigated Enron. This should have been your first point, and you should have expounded upon it with examples and reasoning. Instead you buried it in the middle of a bunch of crap. You're a former SEC lawyer - YOU DID THE SAME THING SHE DID! I'm starting to hate this blog.
at 8:24 am I think it's safe to say that the model of regulatory enforcement is completely broken. We have had a paradigm shift in the industry. It's time for one in enforcement.

Wall Street has become like organized crime. So the question is, how did the FBI break the mob? It professionalized its ranks, making them incorruptible, or nearly so. It sent in moles who gave law enforcement a clear picture of what was going on and who was doing what. It had a powerful agency head who protected all levels of its staff from political interference. And it had an aura and a mission. TV shows, movies. Kids wanted to be G-men, and it was not about the money.

In short, ask yourself, how did Elliot Ness bring down Al Capone? That's what we need to rein in Wall Street. That's our model.

Conscience of a conservative
at 9:33 am Wall Street has not become like the mob. A better analogy would be the cigarette industry. Think of how much more profitable Tobacco would be if lobbyists could convince politicians to defund the FDA. Wall Street's business is not unlike Tobacco , they source product at the cheapest price and attempt to package at the highest price. The prospectus is like the warning label on a pack. Wall Street wants to make sure the warning label says as little as possible and enforcement is not there if they break the rules.

People will always leave the SEC for other jobs, but more people would stay if the pay was better. And the SEC has to go for quick wins and settle or they risk running out of scarce funding.

I,m sure there's some regulatory capture and pressure from the Fed or Treasury ,etc to back off on certain prosecutions, but money is a big issue here and to pretend it's not an issue and blame it 100% on corruption in my view fails to accept the realities of the situation.

One reason why the FDIC is more effective is because their funding situation is better.

at 9:52 am "Ironically, a simple model for clean government comes from Singapore."

Well, at least you've always been straightforward about your desire for authoritarianism.

at 10:07 am Do you expect banks or bank officers to be prosecuted? Take a look at who is the Secretary of the Treasury (Tim Geithner-Goldman Sachs), the Budget Director (Jacob Lew-Citigroup) and the Chief of Staff (William Daley-JP Morgan Chase). Let's face it. The banks are a huge source of political patronage and that's why nobody has been prosecuted for this fiasco. The banks are very glad to hire those who have served them well in office.

The bankruptcy trustee sues JP Morgan Chase because of its complicity in the Madoff scandal. Does the government do anything as a result of potential money laundering? Absolutely not. The Obama administration people are looking out for their futures. Not prosecuting JP Morgan Chase, Citigroup and Goldman Sachs is likely to result in large future rewards.

at 10:10 am Sorry, but I'm skeptical.

First of all, I don't understand why settling a lot of easy cases should impress a top law firm, if indeed what impresses them is outstanding skill.

Secondly, it seems to me the best and most aggressive law enforcers are never primarily motivated by money. They tend to be the kind of people whose spirit would die if they had to work in support of a corrupt organization.

In fact, most of us would much prefer doing something we can believe in rather than something that makes us feel dirty.

I believe the problem at the SEC, as with many government agencies, lies at the top. Good, aggressive staff is drawn to (and often literally loves) a leader who is just like them, and who encourages them and protects them from political efforts to hobble them. And a leadership that doesn't want to rock the boat will find reasons to reject any job applicants who don't "fit in."

Cynical Mumble
at 10:40 am This has always been clear to see for years – that the agencies are captured and do what they're told. In truth, these guys are under considerable pressure to do what they are told, I like the passing discussions on what motivates this mode of operation. I think some SEC lawyers already consider their Government jobs as the proverbial "greener pasture" and simply don't want to fuck that up by offending the industry. I don't believe the budget issues are an issue in why the SEC won't do it's "imaginary" job. Look at the Defense Contractors lining up to feed at the trough to "modernize" the SEC's infrastructure, even if nothing gets done – it is extremely lucrative.
F. Beard
at 11:29 am Why not just give SEC attorneys a percentage of the fines for a successful prosecution plus an extra bounty on criminal convictions? Why not make the SEC itself a lucrative career so there would be little temptation to move to private industry?

Still, I would bet that fundamental reform in money creation would do more to ensure an honest and stable financial system than any amount of regulation.

Independent Accountant
at 11:54 am Full disclosure: I have never worked at the SEC. However, I have been "on the other side of the table" from the SEC for 36 years. The SEC almost invariably selects insigificant cases to pursue and settles them quickly. Most of its lawyers have no understanding of evidence and couldn't try a case if their lives depended on it. The go to the SEC for 3-5 years, get their tickets punched, then leave for law firms which they gave "passes" to as SEC employees. The SEC needs a housecleaning from top to bottom. The SEC has enough money to do its job. It needs to reallocate resources. I had a client with $196 in assets and 32 stockholders, a shell, get an SEC comment letter. Why is the SEC even looking at registrants with less than say $250 million in market cap? Why? Because by spending time on obscure, non-connected firms, it can avoid looking at large connected ones. My bottom line: anyone at the SEC who worked on Wall Street or for a NY BigLaw or Big 87654 firm at any time in the last ten years should be exited. Now. "But the SEC will lose all that valuable expertise". Are you kidding?
at 12:44 pm Do you think the system would be better off with no regulation whatsoever? I ask because I am gradually coming to think that everything eventually gets gamed and corrupted. Thus, since Wall St.'s main occupation apparently is to game the system, the best thing is just to take away the game, i.e. end the charade that there are any rules at all. This means closing the SEC. The system then goes back to Laissez-faire and everyone must rely on their reputation to survive-which means apart from the microsecond trading and other shenanigans, Wall St. goes under because they don't have a shred of good reputation left. If you, or anyone else here has any thoughts I'd like to hear it.
at 12:57 pm The SEC is an important element of the con. It gives the impression that there is a regulatory apparatus out there when, in fact, there is none.

Ineffectual regulation is useful to our looting elites as a distraction. We are left discussing whether the SEC is doing its job or if it is doing its job well enough. Well, the SEC is doing its job and a very good one at that. It is meant to blow smoke at the rubes and give cover to the looters, and it does. It is pure kabuki, the appearance of regulation without any real regulation. It is a Trojan horse. It portrays itself as on the side of reform, of the people, but it is really just an instrument of Wall Street meant to screw over those selfsame people as much as possible.

at 1:49 pm There are two mechanisms to revitalise the SEC:

1) Whistle blowers get 15-30% of fine imposed, a la IRS;

2) A portion of the fine is also distributed to the investigative team.

This should focus minds on large and winnable cases.

Mat Albert 5416
at 2:15 pm In a single paragraph Hugh managed to say pretty much everything that anyone needs to know about the SEC.

There's a pattern which connects all of this, as Hugh has pointed out a number of times before:

from Wikipedia: KLEPTOCRACY

Kleptocrac­y, alternativ­ely cleptocrac­y or kleptarchy­, from Greek kleptes (thieves) and kratos (rule), is a term applied to a government that takes advantage of government­al corruption to extend the personal wealth and political power of government officials and the ruling class (collectiv­ely, kleptocrat­s), via the embezzleme­nt of state funds at the expense of the wider population­, sometimes without even the pretense of honest service. The term means "rule by thieves"."

The only question that remains is how long will the ruling thieves bother with "even the pretense of honest service"?

[Jan 07, 2011] Hedge Funds Bet Heavily on Republicans at End of Election By Peter H. Stone and Michael Isikoff

Small Network of Executives Gave at Least $10 Million
January 05, 2011 | The Center for Public Integrity

A small network of hedge fund executives pumped at least $10 million into Republican campaign committees and allied groups in last year's elections, helping bankroll GOP victories that changed the balance of power in Washington, according to a review of campaign records and interviews with industry insiders.

The review by the Center for Public Integrity and NBC found that some of the heaviest contributions from industry leaders came late in the campaign or were funneled through obscure "joint fundraising committees" and other independent GOP allies - some of which were set up to maximize campaign fundraising or to avoid disclosing the names of big donors. The Center and NBC analyzed campaign data compiled by CQ Moneyline and the Internal Revenue Service.

Bitterly opposed to economic and regulatory policies backed by President Barack Obama and Democrats - including proposals to increase taxes on some of their profits - top Wall Street hedge fund moguls were unusually energized during last year's election. They held multiple fundraisers and coordinated strategy to direct what appear to be unprecedented sums into the coffers of GOP and allied political committees.

The net effect has given hedge funds important new allies at a time when they are fending off some regulations mandated by the Dodd-Frank financial reform law and an aggressive Justice Department investigation into insider trading.

A prime example is Rep. Scott Garrett, a little known Republican from northern New Jersey who has been a staunch defender of the hedge fund industry and will now chair the House financial services subcommittee on capital markets. As it became increasingly clear late last summer that Republicans were likely to capture the House, executives at the hedge fund Elliott Management Co. raised at least $195,800 for two committees that benefited Garrett directly and bolstered his standing with key Republicans. Paul Singer, chairman of the $17 billion Manhattan firm, has been one of the GOP's most prolific fundraisers and donors.

Here's how the $195,800 broke down:

The Elliott contributions provided about 96 percent of all the funds raised by Garrett's victory committee, which shared its proceeds with the National Republican Congressional Committee and other Republicans. These joint committees are not subject to the lower limit of $2,400 per election that applies to an individual candidate. As a result, the lion's share of the largesse went to the NRCC, and less than $10,000 to Garrett's campaign.

"This is particularly appalling," said Ellen Miller, executive director of the Sunlight Foundation, a nonprofit group that promotes transparency in campaign finance and has financially supported the Center. "No one in America will believe that Representative Garrett can provide impartial oversight of the hedge fund industry after taking these huge amounts of money from one company."

Asked to comment about the hefty executive contributions this year to the GOP, a spokesman for Elliott stressed that the firm itself "does not make donations to political candidates or parties. Some individual Elliott employees raise funds and donate to candidates and party organizations, both Democrat and Republican, at the federal and state levels."

Garrett's office did not respond to repeated phone calls and e-mails requesting comment. Garrett is known as a strong free market conservative who has long been supportive of the industry. The contributions from Elliott executives were largely the fundraising handiwork of Keith Horn, Elliott's chief operating officer, who is a constituent of the congressman and has been raising money for him for years, according to a Garrett ally who requested anonymity. Horn declined to comment.

The Elliott contributions to Garrett were only a small portion of a tidal wave of hedge fund contributions that have boosted the industry's fortunes in Washington. The review of campaign data showed that Singer, Elliot's publicity-shy chairman, played a critical role, holding fundraisers for GOP Senate candidates in his Central Park West apartment. He and other Elliot executives donated nearly $500,000 to the National Republican Senatorial Committee, making the firm's executives among the highest overall contributors to that group. The NRSC is the fundraising entity that doles out contributions to help GOP Senate candidates.

Singer was one of several hedge fund billionaires who opened their wallets wide to help the GOP make huge gains on Election Day.

One key industry player was Steven Cohen, the billionaire chairman of SAC Capital Advisors in Stamford, Conn. His firm recently received a subpoena seeking information related to a major Wall Street insider trading probe being conducted by the U.S. Attorney's Office in Manhattan, according to a person familiar with the probe. An SAC spokesman declined to comment for this story.

Another key player who donated to various GOP committees was Ken Griffin, the president of Chicago's Citadel Investment, which reportedly has also received a subpoena in the same insider trading probe. Bruce Kovner of Caxton Associates in Princeton, N.J., Robert Mercer, co-chairman of Renaissance Technologies, which is headquartered on Long Island, and John Paulson, the chairman of Paulson & Co. of Manhattan were also among the leading hedge fund executives to write big checks to GOP coffers.

Spokesmen for Griffin, Kovner, Mercer and Paulson all declined comment.

Some of these hedge fund honchos attended a late August dinner at Cohen's palatial home in Greenwich, Conn., including Singer and Kovner. Dinner conversation featured the upcoming elections and political contributions, according to an industry official familiar with the gathering who requested anonymity.

Among some more notable examples:

The magnitude of the industry donations are particularly notable because at least some of the hedge fund executives have in the past given generously to Democrats. Cohen, for example, has been a major donor to Sen. Chris Dodd, the former chairman of the Senate Banking Committee. The Chicago-based Griffin was even a "bundler" for Obama in the last election. In addition, Paulson was a significant donor and fundraiser for Democratic Sen. Charles Schumer, donating $30,400 to the Democratic Senatorial Campaign Committee as late as June 2009. But in 2010, he increased his giving to Republicans, contributing along with other members of his firm and his wife more than $450,000 to various GOP accounts.

Last year's contributions were driven in large part by hedge fund opposition to many of the tax and regulatory policies of Obama and congressional Democrats. Some hedge fund executives, along with others from private equity funds, were especially exercised about a measure that passed the House last year - but stalled in the Senate - that would tax their profits, known as carried interest, as ordinary income rather than capital gains. If Congress enacted the Democratic-backed tax changes, it would sharply increase taxes on many executives from a marginal rate of 15 percent to 35 percent. Further, some industry players are concerned about provisions in the Dodd-Frank financial services reform law, that would impose tighter rules on the trading of derivatives and require greater public disclosure.

But the animus of hedge fund titans towards Obama and the Democrats was also driven by what they viewed as politically charged rhetoric that stigmatized them.

Obama attacked the industry as "speculators" and criticized its role in Chrysler's bankruptcy, angering hedge fund managers who felt it amounted to demonization that played to class warfare.

To be sure, the $10 million that the network of hedge fund executives donated to GOP causes this cycle was only a small fraction of the overall $4 billion or more that was spent on the elections, but the industry leaders placed their bets on many winners and thus could reap dividends from their political investments.

The $10 million figure represents those larger sums contributed by a number of prominent hedge fund executives. But a full accounting of hedge fund donations would total considerably higher and may never be completely known because some probably donated anonymously to outside groups that don't have to disclose their funding.

The new GOP House may be far friendlier to the hedge fund industry, and some of its key allies are now poised to inherit important leadership positions.

Incoming Majority Leader Eric Cantor of Virginia has been critical of the "carried interest" proposal in the House and has fought hard to block it. In the last two years, Cantor's campaign committee and his leadership PAC, Every Republican is Crucial PAC, received substantial contributions from hedge fund executives, including at least $9,800 from Cohen, $4,800 from Singer, and $4,000 from Griffin. Further, six other executives at Cohen's firm and one of their spouses donated at least $21,500 to Cantor's PAC. And six top executives at the giant private equity firm, KKR, contributed $55,000 to the Cantor Victory Committee, a joint committee that benefitted Cantor's campaign, the NRCC and two other entities.

Asked for comment, Brad Dayspring, a spokesman for Cantor, said the majority leader "has made clear that the new Republican majority will use the oversight process and all means at its disposal -including the power of appropriations - to expose and repeal regulations that kill jobs and are barriers to capital formulation and economic growth."

The improved standing of the hedge fund business is underscored by the rise of Garrett to the chairmanship of the subcommittee that will now oversee the industry. The panel will also oversee much of the implementation of the Dodd-Frank financial services reform law by the Securities and Exchange Commission and some other agencies. Elements of the SEC's expanded powers make some hedge fund executives nervous.

After the GOP success became apparent on election night, Garrett announced that he might seek to overturn parts of the Dodd-Frank measure. And he recently threatened to use his powers to cut funding for the SEC just as the agency has begun efforts to write rules aimed at protecting investors under the law. "Why are we rewarding the agency that failed so miserably on so many fronts?" he told The Wall Street Journal.

Peter Stone is senior political reporter for The Center for Public Integrity, a nonprofit organization dedicated to investigative reporting. Michael Isikoff is national investigative correspondent for NBC News.

The Center's Data Editor David Donald also contributed to this report.

[Jan 02, 2011] 'Summer' Rerun: Buiter Provokes Wrath at Jackson Hole, Says Fed Too Close to Wall Street

January 2, 2011 |

This post first appeared on August 24, 2008

Go Willem Buiter! The London School of Economics prof and former Bank of England and European Bank for Reconstruction and Development official has been saying for some time that the Fed suffers from "cognitive regulatory capture" and has been far too responsive to the needs of Wall Street. It's been puzzling to watch his detailed, well argued criticisms go unnoticed, particularly when they have been offered at forums where one would think they'd be impossible to ignore (for instance, a conference co-hosted by the New York Fed where Buiter presented a pretty harsh paper on what he called the North Atlantic Financial Crisis).

Well, he finally seems to have gotten through, perhaps because he is forward enough to criticize Fed officials to their face at an event they are hosting. Or maybe it's because the pattern of conduct he decries is so patently obvious that the key actors can no longer fool themselves. From Bloomberg:

Former Bank of England policy maker Willem Buiter sparked the biggest debate at the Federal Reserve's annual mountainside symposium, saying the central bank pays too much heed to the concerns of financial institutions.

"The Fed listens to Wall Street and believes what it hears," Buiter said yesterday in a paper presented to the Fed's conference in Jackson Hole, Wyoming. "This distortion into a partial and often highly distorted perception of reality is unhealthy and dangerous."

The Wall Street Journal's Economics blog provides a similar account and a link to the paper.

Mr. Buiter slams the Federal Reserve, European Central Bank and Bank of England for what he says was a mishandling of the financial crisis and monetary policy over the past year. He gives the worst marks to the Fed, saying it's too close to Wall Street and financial markets - responding to their needs to the detriment of the wider economy. Mr. Buiter, a former member of the BOE's Monetary Policy Committee, said the Fed overreacted to the economic slowdown - misjudging the importance of financial stability to the overall economy - and created a deeper inflation problem as a result.

The paper is quite long, but it is very well written and moves very quickly for this sort of exercise (it does get geeky from time to time). I will confess to having read only the first 30 pages, but his argument seems spot on:

My thesis is that both monetary theory and the practice of central banking have failed to keep up with key developments in the financial systems of advanced market economies, and that as a result of this, many central banks were to varying degrees ill-prepared for the financial crisis that erupted on August 9, 2007.

The Fed gets disproportionate attention, in part due to the venue of the presentation, in part because Buiter contends that the Fed did the worst job of the major central banks. Note that Buiter is more of inflation hawk than we are, but as a result, Buiter thinks that letting housing prices decline is not the end of the world and implicitly, adjustments need to run their course (per his point 4). Even though we think this deleveraging will be nastier than Buiter anticipates, we think that trying to hold asset prices at inflated levels will inevitably fail and the effort will only create more damage. To Buiter again:

[T]hree factors contribute to Fed's underachievement as regards macroeconomic stability. The first is institutional: the Fed is the least independent of the three central banks and, unlike the ECB and the BoE, has a regulatory and supervisory role; fear of political encroachment on what limited independence it has and cognitive regulatory capture by the financial sector make the Fed prone to over-react to signs of weakness in the real economy and to financial sector concerns.

The second is a sextet of technical and analytical errors: (1) misapplication of the 'Precautionary Principle'; (2) overestimation of the effect of house prices on economic activity; (3) mistaken focus on 'core' inflation; (4) failure to appreciate the magnitude of the macroeconomic and financial correction/adjustment required to achieve a sustainable external equilibrium and adequate national saving rate in the US following past excesses; (5) overestimation of the likely impact on the real economy of deleveraging in the financial sector; and (6) too little attention paid (especially during the asset market and credit boom
that preceded the current crisis) to the behaviour of broad monetary and credit aggregates.

All three central banks have been too eager to blame repeated and persistent upwards inflation surprises on 'external factors beyond their control', specifically food, fuel and other commodity prices. The third cause of the Fed's macroeconomic underachievement has been its tendency to use the main macroeconomic stability instrument, the Federal Funds target rate, to address financial stability problems. This was an error both because the official policy rate is a rather ineffective tool for addressing liquidity and insolvency issues and because more effective tools were available, or ought to have been. The ECB, and to some extent the BoE, have assigned the official policy rate to their price stability objective and have addressed the financial crisis with the liquidity management tools available to the lender of last resort and market maker of last resort.

Of his three charges, Buiter is on solid ground on the first and third. The second set (his points 1-6) are debatable, but you can make a case for them, and he does.

Some of his comments are blunt:

In the case of the Fed, the nature of the arrangements for pricing illiquid collateral offered by primary dealers invites abuse….

All three central banks have gone well beyond the provision of emergency liquidity to solvent but temporarily illiquid banks. All three have allowed themselves to be used as quasifiscal agents of the state, providing subsidies to banks and other highly leveraged institutions, and assisting in their recapitalisation, while keeping the resulting contingent exposure off the budget and balance sheet of the fiscal authorities. Such subservience to the fiscal authorities undermines the independence of the central banks even in the area of monetary policy.

There is a lot of good stuff. For instance, Buiter discusses the "asymmetric" response of regulators to asset bubbles (they let the bubble run but jump in to try to arrest the collapse) and discusses remedies.

Unfortunately, a lot of participants seemed more interested in defending the Fed than in sifting through Buiter's analysis to see what might be valid and useful:

Fed Governor Frederic Mishkin said Buiter's paper fired "a lot of unguided missiles," and former Vice Chairman Alan Blinder "respectfully disagreed" with his analysis of the central bank's crisis management…..

Mishkin lashed out against Buiter's assertion that the Fed's rate reductions may cause higher consumer prices.

"I wish he had actually read some of the literature on optimal monetary policy, because it might have been very helpful in this context," said Mishkin, who collaborated with Bernanke on inflation research in the 1990s.

Mishkin, a leading advocate of the Fed's effort to sustain economic growth through rapid rate reductions, said research shows that "what you need to do is act more aggressively."

In reply, Buiter said the value of such a strategy "is not at all obvious to me."

[Bank of Isreal's Stanley] Fischer, drawing laughter from the audience, held up a red fire extinguisher saying, "I asked the organizers for some technical assistance in dealing with this discussion."

While defending the Fed, Blinder said Buiter's papers "often feature an alluring mix of brilliant insight and outrageous statements." The central bank's performance, though not flawless, has been "pretty good" given the magnitude of the crisis, he said.

European Central Bank President Jean-Claude Trichet also came to the Fed's defense, saying "what has been done until now has been pretty well done under very difficult circumstances."

Although the Wall Street Journal coverage of the response is less detailed, it says that Blinder, who was tasked with critiquing the paper, told a long-form version of the Dutch boy putting his finger in the dam, and said that Buiter would rather have the dam leak out of obedience to his belief in moral hazard, and let the dam burst.

I may be reading too much into this, but it strikes me that Blinder went out of his way to be insulting (anyone who regularly participates in critiques of academic papers please read the WSJ post and comment).

Part of the problem is stylistic. Even though Buiter is Dutch by descent and dislikes the idea of national identity, his writing style often echos the cut and thrust of Parliamentary debates, a posture that is also well received in English academe and drawing rooms but not well received in the US. So his bluntness is over-the-top by US standards.

From this vantage point, it's obvious that the Fed has become far too dependent on current Wall Street incumbents and thus can be manipulated by them (and in fairness, the people who are doing the persuading may be completely sincere in their views). There were ways to compensate: cultivate contacts with former executives who no longer have close ties, find independent analysts who have useful data and perspectives. No doubt Fed officials have extensive contacts, but it appears they have not been used in a deliberate, orchestrated fashion to test and validate information provided by those currently employed by major financial firms.

The second issue is that even if the Fed is too close to the financial services industry, it still may have made the right policy decisions. The jury is still out. Many people (probably including the Fed officials) hope the crisis has passed, while readers of this blog know there is good reason to think the worst has not arrived in earnest.

Buiter has taken a bold position, The Fed needs to be able to explain why what is good for Wall Street is also good for the economy as a whole. The sort of questions that Buiter is raising are notably absent from the media and US-based first rank economists. The Bloomberg story may not give a full enough account to be certain, but the responses to Buiter's charges do not seem persuasive. They amount to disputes over analytical methods and assertions that everything is working fine (after providing a $400 billion fix with no withdrawal plan and getting support from foreign investors equivalent to $1000 a person. So what's your next act?).

It will take some time to see if events prove Buiter right. And as Cassandras like Nouriel Roubini know, it can sometimes take longer than you anticipate for bad policies to finally yield the expected dismal harvest.

Doc Holiday:

The Recovery Illusion (OT)? HAPPY NEW YEAR & GOOD LUCK.. we will all need lots of magic!!!

Howard Davidowitz Destroys The Recovery Illusion, Debunks The Consumer Renaissance

This is a DH test



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