George Melloan, a former Wall Street Journal columnist and editor, wrote a thought-provoking editorial in last weekend's edition of the paper.
Entitled "The Lesson of Basel's Bean Counters," Melloan's piece is a timely reminder that Basel's various accords afforded exactly zero systemic protection in the event of the actual financial dislocations of the past several years.
Melloan points out that Japanese banks, well-capitalized by Basel standards in 1990, never the less led the Japanese financial sector and economic collapse.
Lehman Brothers, he notes, had "close to triple the core capital required by the Basel standards when it crashed."
Mr. Melloan ends his piece with these passages,
"An assessment of Basel III is provided on the Web site of a London based organization called the Asymmetric Threats Contingency Alliance (ATCA), which came into being in 2001 to promote online discussion of global issues. It concludes, quite plausibly, that "Despite promises that regulators will be vigilant and central bankers more watchful, banks are certain to get into trouble again, as they always have throughout history. The way to protect taxpayers, the Basel III argument goes, is to compel banks to have buffers thick enough to withstand higher losses and longer periods of extreme volatility in financial markets before they call for government intervention."
As the ATCA paper notes, in the days before banks could rely on governments to save them they carried large capital buffers, with core capital sometimes as much as 15% to 25% of assets, as opposed to as little as 2% under current rule. Of course, that made banking more expensive, and bankers were choosier about risks than in today's world, where the U.S. government has chosen to treat some banks as worthy of taxpayer help because they are "too big to fail."
One thing seems certain, the promise of bailouts and better regulation is unlikely to restore better risk judgment to the profession of banking. The opposite is more likely."
Perhaps, before the US Senate and House pass FINREG, or anything like it, with its 1,336 current pages, cooler, wiser heads should consider Melloan's points. Even the decades-long Basel I, II and III accords have been unable to prevent a near-total, global financial meltdown.
If you were to ask me, I'd say less regulation and higher core capital levels on the order of 20% would do a great deal more to avoid, or mitigate, the next, inevitable financial crisis.
Sure, this will make banks less 'hot' in the sense of total return growth. But, in reality, banking has never been the kind of business which lends itself- pun intended- to the sorts of total return performances over time of an Apple, Google or even Home Depot.
Banking is a derivative business. It facilitates societal transaction, wealth transfers and accumulations. But it doesn't exist as and for itself.
I'm not sure banks should ever have become publicly-listed and -traded equities. But, having become so, they really should function and perform more like energy utilities, less like high-flying growth companies.
Friday, April 30, 2010
Criminalizing Financial Sector Mortgage Finance-Related Activities of The Housing Boom
I happened to see a replay of CNBC's 2009 documentary House of Cards which aired last night. I first wrote posts about it last February, here and here. For fun, before writing the rest of this post, with my impressions from the program, post-Goldman Senate lynching, I am rereading my year-ago reactions to the excellent program.
After the re-read of the two prior posts, I can't say that I feel differently from last winter concerning House of Cards.
However, with the recent Senate star chamber event involving Goldman Sachs fresh in my mind, there are additional insights from viewing the CNBC documentary of the housing finance-led financial sector meltdown.
The first involves the obvious absence of regulators from the scene, as David Faber discovered in his on camera interviews. No federal watchdogs attempted to shut down Alt-A, a/k/a "liar loans," from being originated in the first place. No federal banking supervisors nor SEC personnel attempted to stop the firm which David Francis, a now self-employed mortgage banking consultant, back then a mid-level executive in the mortgage-backed security business, and his ilk from churning out CDOs backed by low-quality mortgages.
With so much hoopla over the FINREG bill, it's instructive to see, in the far-from-perfect, but fairly broad documentary, that the same agencies and people to whom sweeping new powers will be given failed miserably in the past decade to exercise their already considerable authority over the nation's financial system.
The CNBC documentary never went near the sins of Congress for mandating Fannie Mae and Freddie Mac to buy and securitize low-quality mortgages. Current NY AG, and odds-on favorite for the state's next governor, Andrew Cuomo, was culpable in this regard, during the Clinton years, as are several members of Congress- Barney Frank, Chris Dodd and Kent Conrad. The CNBC program, ever mindful of the parent network's need to remain on a friendly basis with these politicians, not to mention the parent company, GE's, being a convenient bedfellow of the administration, never dared to explore those governmental and quasi-governmental institutions which got the ball rolling.
The closest they came was in unedited footage of Alan Greenspan musing on what would have occurred, had he tried to pop the growing real estate bubble. I wrote of this in one of the two earlier posts, so I won't repeat it in this one.
What I found myself wondering aloud as I watched the bulk of the program was why, with all this on-air footage as evidence, the SEC and/or other governmental entities didn't pursue any of these other companies, as they have Goldman Sachs.
Specifically, many of the practices highlighted in the program occurred in dealing with mortgage borrowers, not professional investors. Why didn't the Senate choose to expose these people and institutions? Why not subpoena the CNBC documentary's producer, writers, researchers, etc.?
Another major reaction, different than last year's, was to Alan Greenspan's program-ending interview. In those closing moments, Greenspan responded to Faber's question regarding the need for new regulations and laws to prevent a repeat of the crisis.
Greenspan smiles and manages to stifle a laugh. However, he turns deadly serious when he utters words to the effect of either, 'good luck trying,' or 'don't bet on it,' when Faber asks, incredulously, again, if Greenspan really thinks better regulation wouldn't prevent a repeat?
Greenspan then assures Faber that, no matter what governmental actions are taken, a similar event will recur. Not in 10 years, but sometime in the future. Greenspan opines, quite serenely, that it's a function of greed, and is simply unstoppable when it gets going. See, again, my comments in one of last year's posts describing Greenspan explaining that, as Fed chairman, he would have been, actually was, intimidated by Congress into holding the regulatory reins loose during the housing bubble. This has largely been forgotten as Greenspan has been pilloried by Congress. But, back then, he confides, he knew the limits of his ability to intervene, lest Congress, with its populist bent, threaten him with a loss of Fed independence, should he attempt to stop the stampede to finance houses for lower-income Americans.
The House of Cards documentary billed itself as "the definitive" account of the mortgage-related economic crisis. But that's not at all true. It completely omitted any treatment of Clinton's HUD Secretary, Andrew Cuomo, Fannie Mae and its then-head, Franklin Raines, or Freddie Mac. All played key parts in starting the mess. And Congress urged them on.
Finally, the documentary showcased Kyle Bass as a sort of hero for doing his own homework in discovering the unbelievable bases on which rating agencies were classifying CDOs as AAA. Bass shared his concerns with the agencies and at least one investment bank, the now-defunct Bear Stearns.
Ironically, having aired in February of 2009, the now-famous hedge fund manager, John Paulson, wasn't even mentioned. Nobody knew who he was.
So much for the SEC's and Senate's focus on Abacus, ACA and Paulson. He wasn't even a public figure 15 months ago.
As for Kyle Bass, he was portrayed as diligent, honest and ethical for betting against fraud. His fund's 600% return wasn't met with horror or charges of unethical practices or poor sportsmanship for betting against the American dream or the economy.
Now, John Paulson is so reviled.
Where's the fairness in that?
If anything, viewing House of Cards now shows both how much it exposed, and how much it kept hidden, about the housing finance mess that exploded into a global financial crisis.
Today, over two years after Bear Stearns' demise, and nearly three years after the collapse of its two mortgage-backed securities-related hedge funds, we still have no complete, honest and objective account of how and where the housing finance-related financial debacle actually originated, grew and unfolded.
Only its end seems to be obvious, and that still isn't really well-understood.
After the re-read of the two prior posts, I can't say that I feel differently from last winter concerning House of Cards.
However, with the recent Senate star chamber event involving Goldman Sachs fresh in my mind, there are additional insights from viewing the CNBC documentary of the housing finance-led financial sector meltdown.
The first involves the obvious absence of regulators from the scene, as David Faber discovered in his on camera interviews. No federal watchdogs attempted to shut down Alt-A, a/k/a "liar loans," from being originated in the first place. No federal banking supervisors nor SEC personnel attempted to stop the firm which David Francis, a now self-employed mortgage banking consultant, back then a mid-level executive in the mortgage-backed security business, and his ilk from churning out CDOs backed by low-quality mortgages.
With so much hoopla over the FINREG bill, it's instructive to see, in the far-from-perfect, but fairly broad documentary, that the same agencies and people to whom sweeping new powers will be given failed miserably in the past decade to exercise their already considerable authority over the nation's financial system.
The CNBC documentary never went near the sins of Congress for mandating Fannie Mae and Freddie Mac to buy and securitize low-quality mortgages. Current NY AG, and odds-on favorite for the state's next governor, Andrew Cuomo, was culpable in this regard, during the Clinton years, as are several members of Congress- Barney Frank, Chris Dodd and Kent Conrad. The CNBC program, ever mindful of the parent network's need to remain on a friendly basis with these politicians, not to mention the parent company, GE's, being a convenient bedfellow of the administration, never dared to explore those governmental and quasi-governmental institutions which got the ball rolling.
The closest they came was in unedited footage of Alan Greenspan musing on what would have occurred, had he tried to pop the growing real estate bubble. I wrote of this in one of the two earlier posts, so I won't repeat it in this one.
What I found myself wondering aloud as I watched the bulk of the program was why, with all this on-air footage as evidence, the SEC and/or other governmental entities didn't pursue any of these other companies, as they have Goldman Sachs.
Specifically, many of the practices highlighted in the program occurred in dealing with mortgage borrowers, not professional investors. Why didn't the Senate choose to expose these people and institutions? Why not subpoena the CNBC documentary's producer, writers, researchers, etc.?
Another major reaction, different than last year's, was to Alan Greenspan's program-ending interview. In those closing moments, Greenspan responded to Faber's question regarding the need for new regulations and laws to prevent a repeat of the crisis.
Greenspan smiles and manages to stifle a laugh. However, he turns deadly serious when he utters words to the effect of either, 'good luck trying,' or 'don't bet on it,' when Faber asks, incredulously, again, if Greenspan really thinks better regulation wouldn't prevent a repeat?
Greenspan then assures Faber that, no matter what governmental actions are taken, a similar event will recur. Not in 10 years, but sometime in the future. Greenspan opines, quite serenely, that it's a function of greed, and is simply unstoppable when it gets going. See, again, my comments in one of last year's posts describing Greenspan explaining that, as Fed chairman, he would have been, actually was, intimidated by Congress into holding the regulatory reins loose during the housing bubble. This has largely been forgotten as Greenspan has been pilloried by Congress. But, back then, he confides, he knew the limits of his ability to intervene, lest Congress, with its populist bent, threaten him with a loss of Fed independence, should he attempt to stop the stampede to finance houses for lower-income Americans.
The House of Cards documentary billed itself as "the definitive" account of the mortgage-related economic crisis. But that's not at all true. It completely omitted any treatment of Clinton's HUD Secretary, Andrew Cuomo, Fannie Mae and its then-head, Franklin Raines, or Freddie Mac. All played key parts in starting the mess. And Congress urged them on.
Finally, the documentary showcased Kyle Bass as a sort of hero for doing his own homework in discovering the unbelievable bases on which rating agencies were classifying CDOs as AAA. Bass shared his concerns with the agencies and at least one investment bank, the now-defunct Bear Stearns.
Ironically, having aired in February of 2009, the now-famous hedge fund manager, John Paulson, wasn't even mentioned. Nobody knew who he was.
So much for the SEC's and Senate's focus on Abacus, ACA and Paulson. He wasn't even a public figure 15 months ago.
As for Kyle Bass, he was portrayed as diligent, honest and ethical for betting against fraud. His fund's 600% return wasn't met with horror or charges of unethical practices or poor sportsmanship for betting against the American dream or the economy.
Now, John Paulson is so reviled.
Where's the fairness in that?
If anything, viewing House of Cards now shows both how much it exposed, and how much it kept hidden, about the housing finance mess that exploded into a global financial crisis.
Today, over two years after Bear Stearns' demise, and nearly three years after the collapse of its two mortgage-backed securities-related hedge funds, we still have no complete, honest and objective account of how and where the housing finance-related financial debacle actually originated, grew and unfolded.
Only its end seems to be obvious, and that still isn't really well-understood.
Thursday, April 29, 2010
Tuesday's Senate Hearings On Goldman Sachs
Tuesday's post, written midday, didn't take into account the later appearances of Goldman Sachs' CFO, as well as its CEO, Lloyd Blankfein.
By now, some of the shock of the day-long hearings featuring former and current Goldman Sachs employees of varying degrees of seniority has worn off. For me, several things seem clear through the calmer hindsight of the Senate hearings.
First, the Goldman employees were very well coached and, being very intelligent, did an amazing job of both carefully responding to over-reaching, deliberately entrapping questions, plus a few of them actually adapted to the questions over time, becoming increasingly more adroit at finding ways to make positive statements either about Goldman's role or actions, or the process of the securities markets in which the actions took place.
Second, the Senators themselves behaved differently toward more senior Goldman officials. By the time Blankfein appeared, well into the evening, after markets had closed, Senators were going out of their way to give him the benefit of the doubt in answering their questions. Nobody bullied nor attacked Blankfein the way they had lower-level employees, such as Swenson, Sparks and Birnbaum, earlier that day.
Third, the entire context and process of such a Congressional investigation sub-committee hearing should give any business person pause about doing other than relying on fifth amendment protections when appearing, as ordered.
For example, Carl Levin used a particularly obnoxious tactic. He would ask a heavily-contexted, detailed question about a single exhibit from a book literally several inches thick which had been provided to each Goldman witness. When any, which is to say, all, of the Goldman employees would either take time to verify the proper exhibit, or ask a clarifying question, Levin would explode with anger, declaring that the witness was either simply wasting time, in order to 'run out the clock,' or deliberately avoiding giving a direct response.
Never mind that Levin would often ask questions, the answers to which were simply not within the capability of the witnesses to answer with known veracity. Knowing they were under oath, and that their testimony could be used in civil and criminal legal actions, each Goldman witness had to allow themselves to become whipping boys and appear guilty of whatever behavior of which a Senator decided to accuse them. Most Senators would end their question time with a non sequitor, constituent-oriented summary statement which typically accused Goldman's actions of rendering 'millions' of either US residents or their constituents homeless, penniless and jobless.
Fannie Mae and Freddie Mac were never, of course, mentioned by any Senator of either party, at least while I watched.
The very nature of these investigations leaves business people looking guilty of something, if only attempting to be profitable during whatever crisis may have been occurring. It's a near-perfect coincidence of defenseless business witnesses and omnipotent politicians who control the agenda. There is simply no way any witness from a business which Congress has decided to crucify is going to be able to leave an impression of innocence in that venue.
Finally, despite all the posturing, biased and wrongly-framed questions, and other tricks calculated to make Senators look serious and concerned, even crusading for 'the truth,' and Goldman and its employees look guilty of something, if not clearly anything actually illegal, a few things did become clear.
First, despite Blankfein's insistence that the firm went public reluctantly, and only to remain competitive, much of the root of Goldman's current predicament stems from its going public, then skating to the edge of solvency, and, then, falling upon the Fed to allow it to become a chartered commercial bank, and taking TARP funds.
Much of what transpired Tuesday would have been unremarkable had Goldman been either, or both, a privately-owned investment bank and had not taken TARP funds.
In discussions with a colleague yesterday, I noted that Blackstone did not need a TARP-funded bailout.
I suspect much of Goldman's conflicts of interest, due to their proprietary activities, will not be avoidable without the firm splitting itself into pieces, so that underwriting and proprietary activities aren't co-domiciled. That said, there will always be sophisticated counterparties and even underwriting clients who don't have problems with Goldman's internal conflicts of interest. Those firms are capable of making their own decisions regarding risks and positions with respect to all manner of asset classes.
Rather, it is most likely a large group of less-sophisticated clients, including, perhaps, many state and municipal entities, which will now shy away from Goldman Sachs.
In any case, Goldman has not just a public relations problem to manage, but a real problem of conflicts to manage. Not conflicts among clients who may be competitors, both of whom for which Goldman Sachs wants to do underwriting or advisory work.
No, the conflict is that, on one hand, Goldman may represent the firms to the market, underwriting their securities, while, in proprietary activities, explicitly selling the same securities which another part of the firm is soliciting the firm's clients to purchase.
There's no way even Lloyd Blankfein can convince most of America that this is a viable combination. He can talk until he's blue in the face about how clients wish to purchase risk and take positions opposite those of Goldman. But that won't convince most people that Goldman's mix of businesses puts it in a position to, quite often, sell from its own account, because of a belief that the value of an instrument has peaked, that which it is, elsewhere, convincing its clients to purchase and hold.
The Senators' grilling of the various Goldman employees may well be the most extreme example of hard questions regarding Goldman's actions. They may have been over the top, poorly-framed, asked from positions of near-total lack of understanding of the businesses involved.
But the questions did raise discomforting issues for Goldman. Being exposed for selling securities which were thought, internally, to be of poor quality, just looks very bad, and is hard to explain.
Clearly, per yesterday's lead staff editorial in the Wall Street Journal, regulatory 'reform' can't seriously require underwriters or brokers of securities to guarantee that the value of those securities will rise.
But it's hard to see how such reform won't, and probably shouldn't, attempt to force underwriters to disclose opinions about the quality of the securities. Perhaps requiring all underwriters to hold some minimal percentage of the securities for a specified amount of time.
In the final analysis, Goldman Sachs brought the SEC suit and Senate investigation upon itself as a result of having run into the arms of the government for help in 2008. Having made that pact with the devil, it is now having to pay the price.
Perhaps, in retrospect, Goldman would have been better off filing for bankruptcy, as it faced imminent insolvency when credit lines would have been curtailed, in order to have had time to reorganize, restructure funding, and emerge in a better-financed condition.
There's no denying that the firm is now paying for its poor judgement in asking the federal government to rescue it when it was on the edge of collapse.
By now, some of the shock of the day-long hearings featuring former and current Goldman Sachs employees of varying degrees of seniority has worn off. For me, several things seem clear through the calmer hindsight of the Senate hearings.
First, the Goldman employees were very well coached and, being very intelligent, did an amazing job of both carefully responding to over-reaching, deliberately entrapping questions, plus a few of them actually adapted to the questions over time, becoming increasingly more adroit at finding ways to make positive statements either about Goldman's role or actions, or the process of the securities markets in which the actions took place.
Second, the Senators themselves behaved differently toward more senior Goldman officials. By the time Blankfein appeared, well into the evening, after markets had closed, Senators were going out of their way to give him the benefit of the doubt in answering their questions. Nobody bullied nor attacked Blankfein the way they had lower-level employees, such as Swenson, Sparks and Birnbaum, earlier that day.
Third, the entire context and process of such a Congressional investigation sub-committee hearing should give any business person pause about doing other than relying on fifth amendment protections when appearing, as ordered.
For example, Carl Levin used a particularly obnoxious tactic. He would ask a heavily-contexted, detailed question about a single exhibit from a book literally several inches thick which had been provided to each Goldman witness. When any, which is to say, all, of the Goldman employees would either take time to verify the proper exhibit, or ask a clarifying question, Levin would explode with anger, declaring that the witness was either simply wasting time, in order to 'run out the clock,' or deliberately avoiding giving a direct response.
Never mind that Levin would often ask questions, the answers to which were simply not within the capability of the witnesses to answer with known veracity. Knowing they were under oath, and that their testimony could be used in civil and criminal legal actions, each Goldman witness had to allow themselves to become whipping boys and appear guilty of whatever behavior of which a Senator decided to accuse them. Most Senators would end their question time with a non sequitor, constituent-oriented summary statement which typically accused Goldman's actions of rendering 'millions' of either US residents or their constituents homeless, penniless and jobless.
Fannie Mae and Freddie Mac were never, of course, mentioned by any Senator of either party, at least while I watched.
The very nature of these investigations leaves business people looking guilty of something, if only attempting to be profitable during whatever crisis may have been occurring. It's a near-perfect coincidence of defenseless business witnesses and omnipotent politicians who control the agenda. There is simply no way any witness from a business which Congress has decided to crucify is going to be able to leave an impression of innocence in that venue.
Finally, despite all the posturing, biased and wrongly-framed questions, and other tricks calculated to make Senators look serious and concerned, even crusading for 'the truth,' and Goldman and its employees look guilty of something, if not clearly anything actually illegal, a few things did become clear.
First, despite Blankfein's insistence that the firm went public reluctantly, and only to remain competitive, much of the root of Goldman's current predicament stems from its going public, then skating to the edge of solvency, and, then, falling upon the Fed to allow it to become a chartered commercial bank, and taking TARP funds.
Much of what transpired Tuesday would have been unremarkable had Goldman been either, or both, a privately-owned investment bank and had not taken TARP funds.
In discussions with a colleague yesterday, I noted that Blackstone did not need a TARP-funded bailout.
I suspect much of Goldman's conflicts of interest, due to their proprietary activities, will not be avoidable without the firm splitting itself into pieces, so that underwriting and proprietary activities aren't co-domiciled. That said, there will always be sophisticated counterparties and even underwriting clients who don't have problems with Goldman's internal conflicts of interest. Those firms are capable of making their own decisions regarding risks and positions with respect to all manner of asset classes.
Rather, it is most likely a large group of less-sophisticated clients, including, perhaps, many state and municipal entities, which will now shy away from Goldman Sachs.
In any case, Goldman has not just a public relations problem to manage, but a real problem of conflicts to manage. Not conflicts among clients who may be competitors, both of whom for which Goldman Sachs wants to do underwriting or advisory work.
No, the conflict is that, on one hand, Goldman may represent the firms to the market, underwriting their securities, while, in proprietary activities, explicitly selling the same securities which another part of the firm is soliciting the firm's clients to purchase.
There's no way even Lloyd Blankfein can convince most of America that this is a viable combination. He can talk until he's blue in the face about how clients wish to purchase risk and take positions opposite those of Goldman. But that won't convince most people that Goldman's mix of businesses puts it in a position to, quite often, sell from its own account, because of a belief that the value of an instrument has peaked, that which it is, elsewhere, convincing its clients to purchase and hold.
The Senators' grilling of the various Goldman employees may well be the most extreme example of hard questions regarding Goldman's actions. They may have been over the top, poorly-framed, asked from positions of near-total lack of understanding of the businesses involved.
But the questions did raise discomforting issues for Goldman. Being exposed for selling securities which were thought, internally, to be of poor quality, just looks very bad, and is hard to explain.
Clearly, per yesterday's lead staff editorial in the Wall Street Journal, regulatory 'reform' can't seriously require underwriters or brokers of securities to guarantee that the value of those securities will rise.
But it's hard to see how such reform won't, and probably shouldn't, attempt to force underwriters to disclose opinions about the quality of the securities. Perhaps requiring all underwriters to hold some minimal percentage of the securities for a specified amount of time.
In the final analysis, Goldman Sachs brought the SEC suit and Senate investigation upon itself as a result of having run into the arms of the government for help in 2008. Having made that pact with the devil, it is now having to pay the price.
Perhaps, in retrospect, Goldman would have been better off filing for bankruptcy, as it faced imminent insolvency when credit lines would have been curtailed, in order to have had time to reorganize, restructure funding, and emerge in a better-financed condition.
There's no denying that the firm is now paying for its poor judgement in asking the federal government to rescue it when it was on the edge of collapse.
Wednesday, April 28, 2010
Sheila Bair's Self-Serving Support Of Dodd's FINREG Bill
I happened to see FDIC chairman Sheila Bair interviewed at length on CNBC last Friday.
If you ever need proof of how regulators become captive to the majority in Washington, and learn not to express their true views, this interview was it.
Asked about the deeply-flawed Dodd FINREG bill, Bair of course supported it. Keeping mum about the actual open door to bailouts of creditors of failed banks, and the FDIC's favored status as the 'resolution authority,' Bair just nodded slowly, sagely, allowing how it would be an improvement over current regulation.
What did the CNBC co-anchors expect? Bair's agency won the fight to be the go-to outfit for financial sector liquidations. And there aren't even any rules or guidelines to restrain the FDIC, under the bill, from declaring any firm they choose to be in trouble and, therefore, closed.
Continuing their wide-eyed, naive trust in all government officials towing the ruling party line, the CNBC staff listened with rapt attention to every word Bair uttered. Never questioning her motives or her agency's ability to handle failed institutions that aren't small or midsized banks?
Peter Wallison, in a recent Wall Street Journal editorial, noted that the FDIC has no skills in handling the variety of businesses in a modern investment bank like the now-defunct Lehman. His point, of course, was that if the FDIC had been responsible for closing and managing Lehman, it would have been hopelessly overwhelmed by the firm's complexity.
And that's going to be true of the very large financial firms which Dodd's bill envisions failing.
It's gotten to where you really cannot trust the bulk of CNBC's on-air personnel to ask anyone real hardball questions that might provide real insights or truth.
If you ever need proof of how regulators become captive to the majority in Washington, and learn not to express their true views, this interview was it.
Asked about the deeply-flawed Dodd FINREG bill, Bair of course supported it. Keeping mum about the actual open door to bailouts of creditors of failed banks, and the FDIC's favored status as the 'resolution authority,' Bair just nodded slowly, sagely, allowing how it would be an improvement over current regulation.
What did the CNBC co-anchors expect? Bair's agency won the fight to be the go-to outfit for financial sector liquidations. And there aren't even any rules or guidelines to restrain the FDIC, under the bill, from declaring any firm they choose to be in trouble and, therefore, closed.
Continuing their wide-eyed, naive trust in all government officials towing the ruling party line, the CNBC staff listened with rapt attention to every word Bair uttered. Never questioning her motives or her agency's ability to handle failed institutions that aren't small or midsized banks?
Peter Wallison, in a recent Wall Street Journal editorial, noted that the FDIC has no skills in handling the variety of businesses in a modern investment bank like the now-defunct Lehman. His point, of course, was that if the FDIC had been responsible for closing and managing Lehman, it would have been hopelessly overwhelmed by the firm's complexity.
And that's going to be true of the very large financial firms which Dodd's bill envisions failing.
It's gotten to where you really cannot trust the bulk of CNBC's on-air personnel to ask anyone real hardball questions that might provide real insights or truth.
Tuesday, April 27, 2010
Today's Senate Witch Hunt: The Goldman Sachs Hearings
As I'm working this morning, I am listening to/watching the bullying of Goldman employees by several Senators in the venue of a Congressional hearing.
It's disappointing to see Michigan's Carl Levin and Maine's Susan Collins embarrass themselves by displaying their inability to understand how a modern investment bank works. However, nobody involved in these hearings so far has come off looking both intelligent and honest. The Senators look stupid, while the Goldman employees look evasive.
Levin, during his remarks, kept banging away at how the mortgage market collapsed while Goldman took legitimate proprietary trading positions to benefit from this. He tried to portray the firm as doing something illegal by doing this.
Where Levin did, however, score some points, was in linking the internal Goldman emails depicting one mortgage-backed security as "one shitty deal," with its subsequent appearance as a priority deal to be sold to Goldman clients. The Goldman employees fell largely silent as it became clear to viewers of the inquisition that the firm clearly pushed its institutional fixed income sales force to sell securities which the firm itself viewed as being of poor quality.
Mr. Sparks, a former Goldman employee, attempted to note that institutional clients had every opportunity to make their own assessments of the value of such securities. But I'm sure this was lost on most viewers. The lingering impression is that Goldman's institutional sales force operates in the same manner as a 'pump and dump' penny-stock boiler room operation.
Susan Collins, on the other hand, has said nothing to indicate she has the slightest idea of what she is saying. She has continually attempted to ask institutional traders whether they had a duty to look out for their institutional clients' welfare?
What Collins, and, for that matter, Levin, never bother to explain, and I don't actually think understand, is that the entire matter about which they are grilling the Goldman employees was between sophisticated institutional buyers and sellers. And, as several of the Goldman employees note, but is lost on Collins and Levin, is that they were acting as principals, not agents nor brokers.
That is, they were understood by their counterparty to own the securities in question.
Even now, at 11:53AM, Levin is accusing the Goldman parties of stalling and attempting to avoid answering questions, and, therefore, threatening that the hearings will last until the Senators get answers to all of their questions.
Of course, both Levin and Collins have been asking questions of the sort that equate to,
"When did you stop beating your wife?"
They demand incriminating responses to questions which aren't phrased appropriately or relevantly, given the context of the subject matter and the role of Goldman in the particular instances.
I'm quite sure that most business people watching the proceedings see the Senators as hapless, clueless idiots. I certainly do.
However, that doesn't change the clear sense one gets that the Goldman people are all embarrassed by the evidence that they pushed securities which they, privately, thought were of very poor quality.
Of course, it goes without saying that at no time has any Senator gone near the topic of asking why 'stated income' loans, or other questionable mortgages, were originated in the first place. That is, the role of Congress in pushing Fannie and Freddie to securitize such loans, thus making them common currency in the mortgage-backed markets.
Right now, another Senator is grilling Mr. Sparks about securitizing a Washington Mutual mortgage pool that contained so-called 'liar loans.' But he's not interested in learning that the GSEs were the entities that favored these creations. Nor that, having spurred their origination, it was only natural for investment banks to join in the effort to resell them to investors.
After all, what do these Senators think was going to happen to all of these mortgages, if not resold from the GSEs to investors?
All around, the hearings are a farce and an embarrassment to the notion of honest, intelligent, well-informed inquiries into such practices.
It's disappointing to see Michigan's Carl Levin and Maine's Susan Collins embarrass themselves by displaying their inability to understand how a modern investment bank works. However, nobody involved in these hearings so far has come off looking both intelligent and honest. The Senators look stupid, while the Goldman employees look evasive.
Levin, during his remarks, kept banging away at how the mortgage market collapsed while Goldman took legitimate proprietary trading positions to benefit from this. He tried to portray the firm as doing something illegal by doing this.
Where Levin did, however, score some points, was in linking the internal Goldman emails depicting one mortgage-backed security as "one shitty deal," with its subsequent appearance as a priority deal to be sold to Goldman clients. The Goldman employees fell largely silent as it became clear to viewers of the inquisition that the firm clearly pushed its institutional fixed income sales force to sell securities which the firm itself viewed as being of poor quality.
Mr. Sparks, a former Goldman employee, attempted to note that institutional clients had every opportunity to make their own assessments of the value of such securities. But I'm sure this was lost on most viewers. The lingering impression is that Goldman's institutional sales force operates in the same manner as a 'pump and dump' penny-stock boiler room operation.
Susan Collins, on the other hand, has said nothing to indicate she has the slightest idea of what she is saying. She has continually attempted to ask institutional traders whether they had a duty to look out for their institutional clients' welfare?
What Collins, and, for that matter, Levin, never bother to explain, and I don't actually think understand, is that the entire matter about which they are grilling the Goldman employees was between sophisticated institutional buyers and sellers. And, as several of the Goldman employees note, but is lost on Collins and Levin, is that they were acting as principals, not agents nor brokers.
That is, they were understood by their counterparty to own the securities in question.
Even now, at 11:53AM, Levin is accusing the Goldman parties of stalling and attempting to avoid answering questions, and, therefore, threatening that the hearings will last until the Senators get answers to all of their questions.
Of course, both Levin and Collins have been asking questions of the sort that equate to,
"When did you stop beating your wife?"
They demand incriminating responses to questions which aren't phrased appropriately or relevantly, given the context of the subject matter and the role of Goldman in the particular instances.
I'm quite sure that most business people watching the proceedings see the Senators as hapless, clueless idiots. I certainly do.
However, that doesn't change the clear sense one gets that the Goldman people are all embarrassed by the evidence that they pushed securities which they, privately, thought were of very poor quality.
Of course, it goes without saying that at no time has any Senator gone near the topic of asking why 'stated income' loans, or other questionable mortgages, were originated in the first place. That is, the role of Congress in pushing Fannie and Freddie to securitize such loans, thus making them common currency in the mortgage-backed markets.
Right now, another Senator is grilling Mr. Sparks about securitizing a Washington Mutual mortgage pool that contained so-called 'liar loans.' But he's not interested in learning that the GSEs were the entities that favored these creations. Nor that, having spurred their origination, it was only natural for investment banks to join in the effort to resell them to investors.
After all, what do these Senators think was going to happen to all of these mortgages, if not resold from the GSEs to investors?
All around, the hearings are a farce and an embarrassment to the notion of honest, intelligent, well-informed inquiries into such practices.
FINREG's Bailout Provisions Explained
The recently-stalled Senate financial regulation bill, designed, badly, by retiring Senator Chris Dodd, has a particular weakness about which either lies have been told by various Democratic Senators and administration officials, or those people grossly misunderstand what the provisions actually will do.
As Peter Wallison and others have written in the Wall Street Journal editorial pages numerous times over the past several weeks, the Dodd proposal creates a dangerous process, rather than clear law, which may, at the whim of an administration, supersede bankruptcy.
The "resolution authority," as it is named, is to be the FDIC. But, under the terms of the bill, the FDIC may use this authority arbitrarily, which is one major weakness.
But the authority has been defended in the past week by both Austin Goolsbee, the administration's chief economic adviser, and newly-elected Democratic Senator Mark Warner, from Virginia, in interviews on CNBC.
Goolsbee blathered on at length about how there was "no bailout" provision in the bill, because any firm which was seized by the resolution authority would have its managers fired and its shareholders' equity eliminated.
This morning, on CNBC, Warner portrayed the resolution authority as being so distasteful that no firm would willingly prefer it to bankruptcy.
Ah, but Warner omitted the key point. The firm couldn't choose which option, because, under Dodd's absurdly-flawed proposal, the FDIC would do the choosing. Thus, it becomes arbitrary, ripe for occasions of bribery and influence, and the very antithesis of a clear-cut law.
As to Goolsbee, he either lied, or is just so naive as to not understand what Wallison and others, including me, realize about the resolution authority process.
As Wallison wrote in yesterday's Wall Street Journal,
"The Dodd bill has one answer. It says that the FDIC "may make additional payments," over and above what a claimant would be entitled to in bankruptcy, if these payments are necessary "to minimize losses" to the FDIC "from the orderly liquidation" of the failing firm.
This practice is a straightforward bailout of all creditors, and it has been criticized by Congress over the years. Yet here it is, back again, in the guise of an innocuous power to make additional payments to some creditors, coupled with virtually unlimited authority to borrow from the Treasury."
Either Goolsbee is really inept, and unable to understand this provision, or he's lying about it, in order to claim that there is 'no bailout' in the bill.
Nobody who claims there can be a 'bailout' ever meant shareholders.
No, we all refer to the bailout of creditors who were counterparties to debts of the failing firm.
We need look no further than tax-filing-challenged Treasury Secretary Tim Geithner's misguided payments of AIG's debts, in full, to all creditors, especially Goldman Sachs and a large french bank, when bankruptcy proceedings would have treated them much more harshly.
This is the genesis of the charge that those banks viewed by investors as "too big to fail" will be perceived as likely to be handled by the FDIC's proposed "resolution authority" and, thus, be eligible for its counterparties being repaid in full for their debt instruments. Thus, those banks will naturally enjoy lower interest rates, because their lenders will assume they have no principal risk from the transaction.
It's a backdoor GSE clause. The large bank is presumed to have Treasury backing, via the FDIC, in the event of the failure of the very large bank.
That's the bailout. Not of the firm's owners or managers, but its creditors.
And this is, of course, for a financial firm, a much larger amount of capital than its equity. If anything, we should wish the Dodd bill rescued the owners, rather than the counterparties. It would be, though totally illogical, much cheaper for the taxpayer.
Anyway, don't be fooled by any pundits or politicians you hear babbling about the Dodd bill being misrepresented, misunderstood, and/or containing absolutely no "bailout" provisions.
It's just a variant of that old magician's trick where your eyes are drawn to something other than where the real action is happening.
In the case of the Dodd bill, its defenders dwell on the draconian treatment of managers and owners of failed- well, actually, not necessarily failed, but merely firms an administration wishes to close, for any reason- firms, in order to draw your attention away from its overly-generous guarantees of repayment to such a firm's creditors.
If those defenders really don't understand this, they are foolish and inept. If they do, they're lying to the public.
Which do you think it is?
As Peter Wallison and others have written in the Wall Street Journal editorial pages numerous times over the past several weeks, the Dodd proposal creates a dangerous process, rather than clear law, which may, at the whim of an administration, supersede bankruptcy.
The "resolution authority," as it is named, is to be the FDIC. But, under the terms of the bill, the FDIC may use this authority arbitrarily, which is one major weakness.
But the authority has been defended in the past week by both Austin Goolsbee, the administration's chief economic adviser, and newly-elected Democratic Senator Mark Warner, from Virginia, in interviews on CNBC.
Goolsbee blathered on at length about how there was "no bailout" provision in the bill, because any firm which was seized by the resolution authority would have its managers fired and its shareholders' equity eliminated.
This morning, on CNBC, Warner portrayed the resolution authority as being so distasteful that no firm would willingly prefer it to bankruptcy.
Ah, but Warner omitted the key point. The firm couldn't choose which option, because, under Dodd's absurdly-flawed proposal, the FDIC would do the choosing. Thus, it becomes arbitrary, ripe for occasions of bribery and influence, and the very antithesis of a clear-cut law.
As to Goolsbee, he either lied, or is just so naive as to not understand what Wallison and others, including me, realize about the resolution authority process.
As Wallison wrote in yesterday's Wall Street Journal,
"The Dodd bill has one answer. It says that the FDIC "may make additional payments," over and above what a claimant would be entitled to in bankruptcy, if these payments are necessary "to minimize losses" to the FDIC "from the orderly liquidation" of the failing firm.
This practice is a straightforward bailout of all creditors, and it has been criticized by Congress over the years. Yet here it is, back again, in the guise of an innocuous power to make additional payments to some creditors, coupled with virtually unlimited authority to borrow from the Treasury."
Either Goolsbee is really inept, and unable to understand this provision, or he's lying about it, in order to claim that there is 'no bailout' in the bill.
Nobody who claims there can be a 'bailout' ever meant shareholders.
No, we all refer to the bailout of creditors who were counterparties to debts of the failing firm.
We need look no further than tax-filing-challenged Treasury Secretary Tim Geithner's misguided payments of AIG's debts, in full, to all creditors, especially Goldman Sachs and a large french bank, when bankruptcy proceedings would have treated them much more harshly.
This is the genesis of the charge that those banks viewed by investors as "too big to fail" will be perceived as likely to be handled by the FDIC's proposed "resolution authority" and, thus, be eligible for its counterparties being repaid in full for their debt instruments. Thus, those banks will naturally enjoy lower interest rates, because their lenders will assume they have no principal risk from the transaction.
It's a backdoor GSE clause. The large bank is presumed to have Treasury backing, via the FDIC, in the event of the failure of the very large bank.
That's the bailout. Not of the firm's owners or managers, but its creditors.
And this is, of course, for a financial firm, a much larger amount of capital than its equity. If anything, we should wish the Dodd bill rescued the owners, rather than the counterparties. It would be, though totally illogical, much cheaper for the taxpayer.
Anyway, don't be fooled by any pundits or politicians you hear babbling about the Dodd bill being misrepresented, misunderstood, and/or containing absolutely no "bailout" provisions.
It's just a variant of that old magician's trick where your eyes are drawn to something other than where the real action is happening.
In the case of the Dodd bill, its defenders dwell on the draconian treatment of managers and owners of failed- well, actually, not necessarily failed, but merely firms an administration wishes to close, for any reason- firms, in order to draw your attention away from its overly-generous guarantees of repayment to such a firm's creditors.
If those defenders really don't understand this, they are foolish and inept. If they do, they're lying to the public.
Which do you think it is?
Monday, April 26, 2010
Warren Buffett Sings A New Tune On Derivatives As His Ox Is About To Be Gored
Isn't it interesting that Saint Warren of Buffett, the government's favorite billionaire investor, is suddenly pressuring Congress to exempt his firm's derivatives dealings from pending legislation?
Yes, and others like his firms', too, of course.
But the point is, when Buffett's corporate ox is about to be gored, suddenly no amount of lobbying is too small. No exemption from the regulation of hated derivatives is too trivial.
This is the same Buffett who so famously referred to derivatives as "toxic," crediting them for turning financial markets into a "casino."
Well, to paraphrase Churchill, we now know what Buffett is, only his price is left to be determined, isn't it?
Maybe Buffett should have made more nuanced, informed comments when dissing all derivatives. Because you can bet he's now singing a different tune. He's no doubt extolling the necessity of reinsurance and insurance firms using derivatives to hedge their legitimate business risks.
Yes, all true. But not what Warren was saying for the past decade, is it?
No, as losses from new regulatory compliance loom, Buffett is getting a new religion.
If this doesn't sour people on this false "oracle," from Omaha, what will? He's shown himself devoid of real principles when it's crunch time. His views echo his and his firm's P&L, nothing more.
Yes, and others like his firms', too, of course.
But the point is, when Buffett's corporate ox is about to be gored, suddenly no amount of lobbying is too small. No exemption from the regulation of hated derivatives is too trivial.
This is the same Buffett who so famously referred to derivatives as "toxic," crediting them for turning financial markets into a "casino."
Well, to paraphrase Churchill, we now know what Buffett is, only his price is left to be determined, isn't it?
Maybe Buffett should have made more nuanced, informed comments when dissing all derivatives. Because you can bet he's now singing a different tune. He's no doubt extolling the necessity of reinsurance and insurance firms using derivatives to hedge their legitimate business risks.
Yes, all true. But not what Warren was saying for the past decade, is it?
No, as losses from new regulatory compliance loom, Buffett is getting a new religion.
If this doesn't sour people on this false "oracle," from Omaha, what will? He's shown himself devoid of real principles when it's crunch time. His views echo his and his firm's P&L, nothing more.
CNBC Doing The Government's Work This Morning
I caught some of this morning's CNBC programming, to my continuing disappointment.
Despite allegedly being a business channel, the network relies heavy doses of biased so-called reporting from 'Red John' Harwood, who is also a New York Times political columnist.
Thus, during what was supposed to be a discussion of the wisdom of the current financial markets regulatory bill, pseudo-economics reporter Steve Liesman parroted Red John's apparent earlier interview with the co-anchors.
Liesman, who has great difficulty getting basic economics right, and rarely, if ever, refrains from approving liberal economic palliatives and dismissing free market initiatives, chose to spend all of his time approving and rehashing Harwood's earlier statements. Those evidently consisted largely of trashing Republican Majority Leader McConnell for leading the 41 GOP Senators to oppose the current bill because of its provision for explicitly bailing out large financial firms in the future.
A guest on this morning's program, former Paulson Treasury aide and Assistant Secretary Neel Kashkari pointed out that it would make a lot of sense to wait for the admittedly-political Congressionally-appointed blue-ribbon panel investigating the financial mess of the last few years to finish their job before moving forward on any legislation.
In how many businesses would recent failures be handled the way Washington is handling this one? Having experienced a failure, what competent CEO and senior executive team would make significant changes before having agreed upon at least a tentative explanation for that failure?
For their reticence in rushing to redesign the US financial system, Republicans are once again being castigated for counseling delay and examination of the recent problems in the US financial sector.
Later on, Pennsylvania Democratic Representative Paul Kanjorski decried delays in passing the Dodd bill, criticized former President George W. Bush as not understanding economics, despite the fact that he is the only President who earned and MBA, and from a major program.
What I took away from this morning's bizarrely political focus on CNBC is that the network has chosen to push the Dodd bill, despite several obvious facts.
First, Dodd allowed himself to be influenced by sector participants to look the other way on many dangerous practices while heading the Senate committee overseeing the sector.
Second, none of the majority party's leaders or members have admitted to Fannie's and Freddie's role as origins of the financial problems, nor of the current majority party's mandating those GSEs to securitize low-quality mortgages.
Third, the panel appointed by Congress to explore and explain the reasons for and process by which the financial sector problems occurred is months away from any conclusions.
With knowledge of these facts, who in their right mind would rush to legislate a solution? And who in the media would omit some facts, distort political coverage and generally paint a false picture in order to facilitate the passage of such premature, ill-conceived and flawed 'reform?'
CNBC, I guess. Which tells you a lot about what to believe on that network. If it's not straight, factual business news, or opinions about business from an apolitical source, consider it propaganda.
Despite allegedly being a business channel, the network relies heavy doses of biased so-called reporting from 'Red John' Harwood, who is also a New York Times political columnist.
Thus, during what was supposed to be a discussion of the wisdom of the current financial markets regulatory bill, pseudo-economics reporter Steve Liesman parroted Red John's apparent earlier interview with the co-anchors.
Liesman, who has great difficulty getting basic economics right, and rarely, if ever, refrains from approving liberal economic palliatives and dismissing free market initiatives, chose to spend all of his time approving and rehashing Harwood's earlier statements. Those evidently consisted largely of trashing Republican Majority Leader McConnell for leading the 41 GOP Senators to oppose the current bill because of its provision for explicitly bailing out large financial firms in the future.
A guest on this morning's program, former Paulson Treasury aide and Assistant Secretary Neel Kashkari pointed out that it would make a lot of sense to wait for the admittedly-political Congressionally-appointed blue-ribbon panel investigating the financial mess of the last few years to finish their job before moving forward on any legislation.
In how many businesses would recent failures be handled the way Washington is handling this one? Having experienced a failure, what competent CEO and senior executive team would make significant changes before having agreed upon at least a tentative explanation for that failure?
For their reticence in rushing to redesign the US financial system, Republicans are once again being castigated for counseling delay and examination of the recent problems in the US financial sector.
Later on, Pennsylvania Democratic Representative Paul Kanjorski decried delays in passing the Dodd bill, criticized former President George W. Bush as not understanding economics, despite the fact that he is the only President who earned and MBA, and from a major program.
What I took away from this morning's bizarrely political focus on CNBC is that the network has chosen to push the Dodd bill, despite several obvious facts.
First, Dodd allowed himself to be influenced by sector participants to look the other way on many dangerous practices while heading the Senate committee overseeing the sector.
Second, none of the majority party's leaders or members have admitted to Fannie's and Freddie's role as origins of the financial problems, nor of the current majority party's mandating those GSEs to securitize low-quality mortgages.
Third, the panel appointed by Congress to explore and explain the reasons for and process by which the financial sector problems occurred is months away from any conclusions.
With knowledge of these facts, who in their right mind would rush to legislate a solution? And who in the media would omit some facts, distort political coverage and generally paint a false picture in order to facilitate the passage of such premature, ill-conceived and flawed 'reform?'
CNBC, I guess. Which tells you a lot about what to believe on that network. If it's not straight, factual business news, or opinions about business from an apolitical source, consider it propaganda.
Friday, April 23, 2010
Paul Ingrassia On Ed Whitacre's Publicity Stunt
Paul Ingrassia, the one-time Wall Street Journal reporter, bureau chief and senior executive, and Pulitzer Prize-winning author, wrote about Ed Whitacre's big publicity stunt on Wednesday, in this morning's edition of the Journal.
Echoing my own comments, Ingrassia explained that the amount of government equity in GM, versus the 'debt' it loaned the bankrupt company, was really a matter of discretion. Not some market-determined mix.
As such, Ingrassia pointed out that, while it's true Whitacre paid off a $5.8B loan far ahead of anyone's expectation, GM still owes the government, meaning you and me, about $52B in 'equity,' which was really just old GM debt converted, via government bailout money, into government ownership of the defunct car maker.
Ingrassia then smugly noted that market-leader Ford, a much healthier and better-managed competitor, by comparison, has a market cap of only $48B.
This reinforces the point I made in that post,
"It is just this process that is frustrated by crony capitalism such as we've witnessed in the GM bailout. Instead of the resources wasted at GM being freed up to be used elsewhere in the economy, they were allowed to remain in place, then more capital added, from taxpayers, as a free equity injection. Free to GM, but very costly to taxpayers and the economy in general.
Force GM off government life support, force it out into the private sector whole or in pieces, forcing taxpayers, the federal government and, most of all, you, Ed, to see what a discount to the government's bailout price is taken on the IPO.
Now, wouldn't that be eye-opening? Somehow, Ed, I doubt you'd be toasting that event."
Thanks to Paul Ingrassia's convenient provision of Ford's numbers, we can easily see that GM could not possibly get $52B from private investors to replace the government's "equity" position. It's underwater.
So far from repaying a loan in full, Whitacre merely made a downpayment of just over 10% of our taxpayer bailout to GM, or about $6B of the $58B in old GM balance sheet capital replaced with public money.
Quite the different picture, eh? A 10% payoff, not 100%.
Keep trying, Ed. You've got a very long way to go.
Echoing my own comments, Ingrassia explained that the amount of government equity in GM, versus the 'debt' it loaned the bankrupt company, was really a matter of discretion. Not some market-determined mix.
As such, Ingrassia pointed out that, while it's true Whitacre paid off a $5.8B loan far ahead of anyone's expectation, GM still owes the government, meaning you and me, about $52B in 'equity,' which was really just old GM debt converted, via government bailout money, into government ownership of the defunct car maker.
Ingrassia then smugly noted that market-leader Ford, a much healthier and better-managed competitor, by comparison, has a market cap of only $48B.
This reinforces the point I made in that post,
"It is just this process that is frustrated by crony capitalism such as we've witnessed in the GM bailout. Instead of the resources wasted at GM being freed up to be used elsewhere in the economy, they were allowed to remain in place, then more capital added, from taxpayers, as a free equity injection. Free to GM, but very costly to taxpayers and the economy in general.
Force GM off government life support, force it out into the private sector whole or in pieces, forcing taxpayers, the federal government and, most of all, you, Ed, to see what a discount to the government's bailout price is taken on the IPO.
Now, wouldn't that be eye-opening? Somehow, Ed, I doubt you'd be toasting that event."
Thanks to Paul Ingrassia's convenient provision of Ford's numbers, we can easily see that GM could not possibly get $52B from private investors to replace the government's "equity" position. It's underwater.
So far from repaying a loan in full, Whitacre merely made a downpayment of just over 10% of our taxpayer bailout to GM, or about $6B of the $58B in old GM balance sheet capital replaced with public money.
Quite the different picture, eh? A 10% payoff, not 100%.
Keep trying, Ed. You've got a very long way to go.
The Democratic Push For Financial Regulatory Phony Crony-Reform
I'm listening to the resigning Senator from Connecticut, Chris Dodd, misrepresent his flawed financial regulatory 'change' bill. It's unworthy of the adjective "reform."
Evidently, Dodd is now brain-damaged, as his remarks on CNBC reflect an alternative-universe sort of description of what happened to the financial sector in this last decade.
Among the many lies Dodd is telling as I write this are:
-Unlike health care reform, which most Americans didn't understand, they understand the ins and outs of financial reform.
-Fannie and Freddie need reform, but aren't in the first rank of problems.
-His bill brings 'shadow markets' into the a sort of regulatory light.
-Any opposition to his bill is political, and consists of niggling details meant to totally foil any financial regulatory reform.
Honestly, Dodd is so grafted-up and confused that he can't even come close to knowing reality when he sees it anymore.
Here's the truth about his deeply-flawed bill to change- I won't dignify it with the word "reform" - the financial sector of the US economy.
First, both in Dodd's bill, and his party's president address yesterday at Cooper Union, much is made of various new rules for the sector.
Derivatives are to be cleared through an exchange- subject to the CFTC's chairman's choice.
Banks will be judged for solvency by a federal regulator.
Regulatory officials, not Congress, via legislation that remains clear and unchanged, will decide what is 'proprietary trading.'
Between the president's failure to acknowledge Congress' and the Fed's roles in starting the financial mess, via too-long and too-low interest rates, accommodative monetary policy for a decade, and converting Fannie and Freddie into low-cost public housing finance agencies, and Dodd's bill's many reliances on the discretion of regulatory agencies, the Democratic regime is attempting to inject more, not less uncertainty into being a financial service firm.
This morning's Wall Street Journal lead staff editorial notes how much of the currently-proposed legislation defers important regulatory definitions and rules to an ever-shifting group of federal bureaucrats. A group that will change with each new administration.
Rather than a fairly simply, clear set of rules, a la Glass-Steagall, the muddled Dodd bill, which the president demands be passed without significant change, actually allows markets to experience regulatory changes from strict to lax. Wait long enough, and perhaps a permissive administration will allow what was once forbidden.
How does this help provide lasting clarity and certainty to the US financial markets and sector?
The bulk of the financial sector's activities are, contrary to the profoundly misinformed Senator Dodd's belief, not only not understood by most voters, but not even known. Few citizens understand the arcane and complex worlds of structured finance underwriting or derivatives and swaps trading and accounting.
Further, as the Journal's editorial notes, Dodd's bill doesn't bring much of anything 'out of the shadows.' Instead, it will guarantee even more expensive, perpetual lobbying by financial firms to influence the changing corps of bureaucrats who oversee the industry.
Laws which are clear and unchanging don't promote constant attempts to interpret them differently. Dodd's bill, which puts so much regulatory action at the discretion of appointed bureaucrats, without clear language or metrics, invite constant attempts to curry favor and buy favorable rulings at federal agencies.
This is how big government gets bigger. Write murky law and leave it to unnamed, unelected agency officials to make key decisions, thus making business dependent upon the political class for their daily survival.
The president's glaring omission of mention of Freddie or Fannie in his address yesterday confirms his inability to actually understand how the seeds of financial trouble were planted. Even though he voted to stop legislation that might have reined in these two GSEs, which were the true origin of the financial mess. A mess which gained momentum when private mortgage finance operations got rolling to feed the demand by Fannie and Freddie for low-quality mortgages via "liar loans" and subprime paper.
Holman Jenkins, Jr. wrote, in Wednesday's Wall Street Journal,
"It's true that such deals gave housing bulls an additional way to lose money. But to blame shorts for making the bubble worse comes close to saying salvation for the markets is to exclude participants who are bearish.
This is especially peculiar since the bubble's true Rosetta Stone is being ignored, though it has been hammered away at by a member of Washington's own Financial Crisis Inquiry Commission, in the person of Peter Wallison.
Mr. Wallison has publicized new data showing that Fannie, Freddie and FHA financed a lot more subprime and Alt-A loans than anyone realized (because they were mislabeled). It turns out almost half of the $10.6 trillion in U.S. mortgages outstanding in 2008 were low quality. This is the data that might have changed investors' minds—suggesting that the American public's capacity to shoulder housing debt was far more saturated than anybody knew."
I was struck by yesterday's Yahoo Finance page headline declaring that Obama was going to New York, the 'source of the financial collapse,' or words to that effect.
How misleading! Washington, not New York, originated our recent financial meltdown. Then mortgage, commercial and investment banks obligingly fed Fannie, Freddie and FHA with the low-quality loans they demanded, at Congress' behest, then also obligingly repackaged the GSE paper as CDOs to sell globally. Alan Greenspan's and Ben Bernanke's ultra-low Fed interest rates helped this party continue by inflation housing values and supplying plenty of low-cost funding.
How you come to blame commercial and investment banks for this mess is difficult to understand.
Thus, our president and his party's lead Congressional legislator on this topic, Chris Dodd, both have earned zero credibility by ignoring the truth, and substituting their false account of the debacle.
From these false explanations of the financial crisis' origins, you cannot expect effective financial regulatory 'reform' to come.
Add the Democrats' demonization of any Republican who dares suggest that Dodd's bill is not, a la Candide, 'the best of all possible financial reform legislations,' and you have a new disaster in the making.
Finally, politicians of all stripes and both parties are running about blathering about how 'getting financial reform right will help the economy, but getting it wrong will be a disaster.' Even Karl Rove wrote that in his Journal column yesterday.
I respectfully disagree. Getting it wrong, yes, will invite new disasters. But getting it right just allows the economy to function smoothly. It doesn't magically create wealth or economic growth.
There are a few glaring, existing problems that need to be addressed immediately, and, like health care, could be done in a one-page bill. As my friend and experienced senior financial executive, B, foresaw over a decade ago, something approximating Glass-Steagall or the Volcker Rule needs to be enacted as clear, simple and unyielding legislation right now.
Simply put, any financial institutions that enjoys the protection of federal, taxpayer-provided insurance cannot be allowed to engage in risk-enhancing activities including: proprietary trading, investing in assets other than Treasuries, or underwriting of securities. They also can't invest in companies or businesses, either arms-length or as subsidiaries, which use leverage and/or do any of these activities.
Other than that, virtually every other aspect of Dodd's bill needs to be reconsidered, rewritten and carefully debated, with testimony in open hearings by players in the financial sector, before anything is passed.
As with health care, the president, in his Cooper Union address, is again wrong to demand immediate passage of proposed legislation just to 'get something done,' while characterizing anyone who dares disagree with this bum's rush approach as anti-regulation, anti-public good, and merely greedy and self-serving.
As I noted in this post yesterday,
"I wasn't about to waste my time listening to an uninformed, naive politician natter on about financial regulation. Experience has shown that, from this president, all you'll hear about financial sector regulation is some ill-informed notions of consumer protection, the vilification of private institutions, and a complete ignorance of Congress' own culpability in the recent financial mess.
I'm sure the evening cable news programs and tomorrow's Journal will provide me with all the details I need to know about this morning's speech. How the president railed against and demonized the legitimate expression of opinion by publicly-held banks, through lobbyists, concerning regulation affecting the sector."
It develops that I was correct. Our uninformed president provided nothing remarkable, nor new, in his remarks. They were the usual bashing of current businesses and the petulant demand to pass his party's legislation, unchanged, or risk being publicly targeted as anti-social.
If this is good governance, we're in big trouble. And we are.
Evidently, Dodd is now brain-damaged, as his remarks on CNBC reflect an alternative-universe sort of description of what happened to the financial sector in this last decade.
Among the many lies Dodd is telling as I write this are:
-Unlike health care reform, which most Americans didn't understand, they understand the ins and outs of financial reform.
-Fannie and Freddie need reform, but aren't in the first rank of problems.
-His bill brings 'shadow markets' into the a sort of regulatory light.
-Any opposition to his bill is political, and consists of niggling details meant to totally foil any financial regulatory reform.
Honestly, Dodd is so grafted-up and confused that he can't even come close to knowing reality when he sees it anymore.
Here's the truth about his deeply-flawed bill to change- I won't dignify it with the word "reform" - the financial sector of the US economy.
First, both in Dodd's bill, and his party's president address yesterday at Cooper Union, much is made of various new rules for the sector.
Derivatives are to be cleared through an exchange- subject to the CFTC's chairman's choice.
Banks will be judged for solvency by a federal regulator.
Regulatory officials, not Congress, via legislation that remains clear and unchanged, will decide what is 'proprietary trading.'
Between the president's failure to acknowledge Congress' and the Fed's roles in starting the financial mess, via too-long and too-low interest rates, accommodative monetary policy for a decade, and converting Fannie and Freddie into low-cost public housing finance agencies, and Dodd's bill's many reliances on the discretion of regulatory agencies, the Democratic regime is attempting to inject more, not less uncertainty into being a financial service firm.
This morning's Wall Street Journal lead staff editorial notes how much of the currently-proposed legislation defers important regulatory definitions and rules to an ever-shifting group of federal bureaucrats. A group that will change with each new administration.
Rather than a fairly simply, clear set of rules, a la Glass-Steagall, the muddled Dodd bill, which the president demands be passed without significant change, actually allows markets to experience regulatory changes from strict to lax. Wait long enough, and perhaps a permissive administration will allow what was once forbidden.
How does this help provide lasting clarity and certainty to the US financial markets and sector?
The bulk of the financial sector's activities are, contrary to the profoundly misinformed Senator Dodd's belief, not only not understood by most voters, but not even known. Few citizens understand the arcane and complex worlds of structured finance underwriting or derivatives and swaps trading and accounting.
Further, as the Journal's editorial notes, Dodd's bill doesn't bring much of anything 'out of the shadows.' Instead, it will guarantee even more expensive, perpetual lobbying by financial firms to influence the changing corps of bureaucrats who oversee the industry.
Laws which are clear and unchanging don't promote constant attempts to interpret them differently. Dodd's bill, which puts so much regulatory action at the discretion of appointed bureaucrats, without clear language or metrics, invite constant attempts to curry favor and buy favorable rulings at federal agencies.
This is how big government gets bigger. Write murky law and leave it to unnamed, unelected agency officials to make key decisions, thus making business dependent upon the political class for their daily survival.
The president's glaring omission of mention of Freddie or Fannie in his address yesterday confirms his inability to actually understand how the seeds of financial trouble were planted. Even though he voted to stop legislation that might have reined in these two GSEs, which were the true origin of the financial mess. A mess which gained momentum when private mortgage finance operations got rolling to feed the demand by Fannie and Freddie for low-quality mortgages via "liar loans" and subprime paper.
Holman Jenkins, Jr. wrote, in Wednesday's Wall Street Journal,
"It's true that such deals gave housing bulls an additional way to lose money. But to blame shorts for making the bubble worse comes close to saying salvation for the markets is to exclude participants who are bearish.
This is especially peculiar since the bubble's true Rosetta Stone is being ignored, though it has been hammered away at by a member of Washington's own Financial Crisis Inquiry Commission, in the person of Peter Wallison.
Mr. Wallison has publicized new data showing that Fannie, Freddie and FHA financed a lot more subprime and Alt-A loans than anyone realized (because they were mislabeled). It turns out almost half of the $10.6 trillion in U.S. mortgages outstanding in 2008 were low quality. This is the data that might have changed investors' minds—suggesting that the American public's capacity to shoulder housing debt was far more saturated than anybody knew."
I was struck by yesterday's Yahoo Finance page headline declaring that Obama was going to New York, the 'source of the financial collapse,' or words to that effect.
How misleading! Washington, not New York, originated our recent financial meltdown. Then mortgage, commercial and investment banks obligingly fed Fannie, Freddie and FHA with the low-quality loans they demanded, at Congress' behest, then also obligingly repackaged the GSE paper as CDOs to sell globally. Alan Greenspan's and Ben Bernanke's ultra-low Fed interest rates helped this party continue by inflation housing values and supplying plenty of low-cost funding.
How you come to blame commercial and investment banks for this mess is difficult to understand.
Thus, our president and his party's lead Congressional legislator on this topic, Chris Dodd, both have earned zero credibility by ignoring the truth, and substituting their false account of the debacle.
From these false explanations of the financial crisis' origins, you cannot expect effective financial regulatory 'reform' to come.
Add the Democrats' demonization of any Republican who dares suggest that Dodd's bill is not, a la Candide, 'the best of all possible financial reform legislations,' and you have a new disaster in the making.
Finally, politicians of all stripes and both parties are running about blathering about how 'getting financial reform right will help the economy, but getting it wrong will be a disaster.' Even Karl Rove wrote that in his Journal column yesterday.
I respectfully disagree. Getting it wrong, yes, will invite new disasters. But getting it right just allows the economy to function smoothly. It doesn't magically create wealth or economic growth.
There are a few glaring, existing problems that need to be addressed immediately, and, like health care, could be done in a one-page bill. As my friend and experienced senior financial executive, B, foresaw over a decade ago, something approximating Glass-Steagall or the Volcker Rule needs to be enacted as clear, simple and unyielding legislation right now.
Simply put, any financial institutions that enjoys the protection of federal, taxpayer-provided insurance cannot be allowed to engage in risk-enhancing activities including: proprietary trading, investing in assets other than Treasuries, or underwriting of securities. They also can't invest in companies or businesses, either arms-length or as subsidiaries, which use leverage and/or do any of these activities.
Other than that, virtually every other aspect of Dodd's bill needs to be reconsidered, rewritten and carefully debated, with testimony in open hearings by players in the financial sector, before anything is passed.
As with health care, the president, in his Cooper Union address, is again wrong to demand immediate passage of proposed legislation just to 'get something done,' while characterizing anyone who dares disagree with this bum's rush approach as anti-regulation, anti-public good, and merely greedy and self-serving.
As I noted in this post yesterday,
"I wasn't about to waste my time listening to an uninformed, naive politician natter on about financial regulation. Experience has shown that, from this president, all you'll hear about financial sector regulation is some ill-informed notions of consumer protection, the vilification of private institutions, and a complete ignorance of Congress' own culpability in the recent financial mess.
I'm sure the evening cable news programs and tomorrow's Journal will provide me with all the details I need to know about this morning's speech. How the president railed against and demonized the legitimate expression of opinion by publicly-held banks, through lobbyists, concerning regulation affecting the sector."
It develops that I was correct. Our uninformed president provided nothing remarkable, nor new, in his remarks. They were the usual bashing of current businesses and the petulant demand to pass his party's legislation, unchanged, or risk being publicly targeted as anti-social.
If this is good governance, we're in big trouble. And we are.
Thursday, April 22, 2010
The Financial 'Blah Blah' At Cooper Union This Morning
I didn't listen to the president's address this morning, from Cooper Union, on regulating the financial sector.
Leaving aside the not-so-subtle attempt to portray himself as the second Lincoln, using that venue, I wasn't about to waste my time listening to an uninformed, naive politician natter on about financial regulation. Experience has shown that, from this president, all you'll hear about financial sector regulation is some ill-informed notions of consumer protection, the vilification of private institutions, and a complete ignorance of Congress' own culpability in the recent financial mess.
Including, by the way, the president's participation in obstructing cloture on a vote for a Republican financial regulation reform bill that helped lead to the 2007-2008 meltdown. And Obama was, according to Peter Wallison, writing in Tuesday's Wall Street Journal,
"the third largest recipient of campaign contributions from Fannie Mae and Freddie Mac, behind only Sens. Chris Dodd and John Kerry."
And, besides, I begin to become physically ill when I hear him begin his sing-songy drone in that annoying tone of voice. Complete with what he evidently thinks is a folksy dropping of occasional "g"s. I'm from Illinois, and we don't actually talk that way out on the Plains, once we've been to college. Not to mention grad school.
Funny how he forgot to mention those campaign contributions, when he recently accused Republican Senate Majority Leader Mitch McConnell of meeting with banking representatives before deciding on his position regarding Chris Dodd's deeply-flawed attempt at financial regulatory "reform."
I'm sure the evening cable news programs and tomorrow's Journal will provide me with all the details I need to know about this morning's speech. How the president railed against and demonized the legitimate expression of opinion by publicly-held banks, through lobbyists, concerning regulation affecting the sector.
With this in mind, I expect to write more in tomorrow's post about this morning's political non-event at Cooper Union.
Leaving aside the not-so-subtle attempt to portray himself as the second Lincoln, using that venue, I wasn't about to waste my time listening to an uninformed, naive politician natter on about financial regulation. Experience has shown that, from this president, all you'll hear about financial sector regulation is some ill-informed notions of consumer protection, the vilification of private institutions, and a complete ignorance of Congress' own culpability in the recent financial mess.
Including, by the way, the president's participation in obstructing cloture on a vote for a Republican financial regulation reform bill that helped lead to the 2007-2008 meltdown. And Obama was, according to Peter Wallison, writing in Tuesday's Wall Street Journal,
"the third largest recipient of campaign contributions from Fannie Mae and Freddie Mac, behind only Sens. Chris Dodd and John Kerry."
And, besides, I begin to become physically ill when I hear him begin his sing-songy drone in that annoying tone of voice. Complete with what he evidently thinks is a folksy dropping of occasional "g"s. I'm from Illinois, and we don't actually talk that way out on the Plains, once we've been to college. Not to mention grad school.
Funny how he forgot to mention those campaign contributions, when he recently accused Republican Senate Majority Leader Mitch McConnell of meeting with banking representatives before deciding on his position regarding Chris Dodd's deeply-flawed attempt at financial regulatory "reform."
I'm sure the evening cable news programs and tomorrow's Journal will provide me with all the details I need to know about this morning's speech. How the president railed against and demonized the legitimate expression of opinion by publicly-held banks, through lobbyists, concerning regulation affecting the sector.
With this in mind, I expect to write more in tomorrow's post about this morning's political non-event at Cooper Union.
Recent Revelations Concerning The SEC v. Goldman Sachs RE: ACA
I first, and most recently, wrote about the SEC's civil suit against Goldman Sachs on the day after the former filed its suit, on Friday of last week.
Since that time, various news organizations have been scurrying about, interviewing, or attempting to interview, major players in the several years-old case.
Paola Pellegrini, then with Paulson's hedge fund, Laura Schwartz, then with ACA, and Fabrice Tourre, the Goldman employee most involved with the Abacus deal, were all spotlighted in the Wall Street Journal yesterday.
The most revealing information that has appeared in the public domain since last Friday has been attributed to Pellegrini. His alleged contentions seem to directly contradict several assertions in the SEC's case.
Specifically, it appears that Pellegrini says that ACA knew that Paulson's firm was involved in the deal. ACA also apparently exercised considerable discretion in rejecting some of Paulson's suggested inclusions, substituting other mortgages which, it later developed, actually reduced the quality of the resulting CDO.
What's losing credibility, though, is at least one of the SEC's two charges against Goldman- that it hid Paulson's involvement from ACA.
On CNBC this morning, several people debated whether Goldman would, if it could, settle this case. The preponderance of opinion was that it would not, since it needs to refute the SEC's charges in court, in order to emerge free of taint of actual illegal behavior. I would agree.
In my prior post, I emphasized that even if Goldman didn't engage in illegal activities, this case may finally convince many institutions to be wary of dealing with Goldman, having evidence that you simply cannot trust the firm to view any counterparty as a 'valued client' whom the firm won't treat roughly when given the opportunity.
To me, reviewing the additional information of the past week, the SEC's case appears much weaker than it did when first announced.
Yesterday's Wall Street Journal's column by Holman Jenkins, Jr., made a convincing case that this suit is the SEC's attempt to accomplish a largely political task, i.e., fight for and win a larger role in financial regulation under the currently-proposed so-called 'reform' bill. Others allege that the SEC is attempting to fill the media with stories about the SEC that don't focus on its decision to leave Allen Stanford alone years ago. In short, the high profile Goldman case is meant to focus public attention on the agency and a major financial sector vendor. Perhaps even curry favor with Congressional Democrats for delivering a convenient victim in time to drive passage of the legislation. Jenkins wrote,
"The need for villains frequently (not always) conflicts with the need for understanding. The SEC certainly understands the need for a rapid route to rehabilitation for itself if it hopes for a share of the power and budget up for grabs in the Senate debate over financial reform. If you don't think this played a role in the suit it sprang on Goldman last week, we have a CDO to sell you."
Jenkins also argued persuasively that much about the Abacus case involves a latent public and regulatory distaste for those who profit on the short side of transactions. Though necessary and helpful to real, free markets, short-side activity carries a stigma, since the profit comes from the destruction of someone else's financial value. He also contended in his column,
"Goldman will have to decide for itself if its business model can be defended in the court of public opinion. But let's admit there's an implicit long bias to the SEC's case. Nobody would give a hoot if Mr. Paulson were the party who lost money. The SEC would never have gone on its hunt for something, anything, to hang a fraud case on."
I think it's fair to say that dealings between a complicated, multi-business financial giant like Goldman and institutional counterparties is very different than from, say, GE's jet engine business and an airline.
There are lots of rules governing how the execution of trades in financial markets are to be performed which, generally, lend a bias against the legality of too much coziness between parties in the business. For example, a firm having securities underwritten by a firm like Goldman must understand that Goldman couldn't hide material information about the firm when selling the securities to its customers.
Years ago, Frank Quattrone, then of CSFB, was accused of illegal behavior resulting from alleged ties between IPO allocations and other business activities.
My point is that employees at institutions dealing with major market-making, trading firms, including the now-commercial banks such as Goldman Sachs and Morgan Stanley, are wise to view any solicitations to buy securities cautiously.
One natural reaction of a potential buyer could, and should be,
"If it's such a great deal, why are letting me in, and not keeping it all for yourself?"
There are some valid answers, such as selling a sufficient amount of a security to ensure a liquid market for future trading and valuation. But the core of the question is germane, especially to a firm like Goldman, which has so many different businesses in the financial sector. Its GSAM asset management group could well provide a sufficient appetite for many choice Goldman underwriting products.
From this perspective, it's simply ludicrous that the SEC would claim that Goldman failed to tell potential buyers of the CDOs who had been involved in their creation. All of the sophisticated investors with whom they dealt, former SEC legal personnel's opinions notwithstanding, had both the savvy and opportunity, as Holman Jenkins noted in his column, to ask for sufficient information prior to their purchase of the CDOs from Goldman.
If it were truly important to an institutional investor to know the provenance of the entire Abacus deal, and Goldman refused to disclose it, well, I would expect such an investor to refrain from buying the CDOs.
At no time does it appear that any Goldman employee put a gun to any institutional investor's head to force her/him to buy any of the Abacus deal.
At this point, I'm guessing that Goldman is eager to get to trial, in order to publicly dimantle the SEC's case. Short of that, a withdrawal of the suit by the agency would be the next best remedy.
Failing the disclosure of some truly illegal, explicit misrepresentation of the Abacus deal by Goldman personnel, though, it's looking less likely that the SEC complaint has merit in the context the world of sophisticated institutional investors.
Since that time, various news organizations have been scurrying about, interviewing, or attempting to interview, major players in the several years-old case.
Paola Pellegrini, then with Paulson's hedge fund, Laura Schwartz, then with ACA, and Fabrice Tourre, the Goldman employee most involved with the Abacus deal, were all spotlighted in the Wall Street Journal yesterday.
The most revealing information that has appeared in the public domain since last Friday has been attributed to Pellegrini. His alleged contentions seem to directly contradict several assertions in the SEC's case.
Specifically, it appears that Pellegrini says that ACA knew that Paulson's firm was involved in the deal. ACA also apparently exercised considerable discretion in rejecting some of Paulson's suggested inclusions, substituting other mortgages which, it later developed, actually reduced the quality of the resulting CDO.
What's losing credibility, though, is at least one of the SEC's two charges against Goldman- that it hid Paulson's involvement from ACA.
On CNBC this morning, several people debated whether Goldman would, if it could, settle this case. The preponderance of opinion was that it would not, since it needs to refute the SEC's charges in court, in order to emerge free of taint of actual illegal behavior. I would agree.
In my prior post, I emphasized that even if Goldman didn't engage in illegal activities, this case may finally convince many institutions to be wary of dealing with Goldman, having evidence that you simply cannot trust the firm to view any counterparty as a 'valued client' whom the firm won't treat roughly when given the opportunity.
To me, reviewing the additional information of the past week, the SEC's case appears much weaker than it did when first announced.
Yesterday's Wall Street Journal's column by Holman Jenkins, Jr., made a convincing case that this suit is the SEC's attempt to accomplish a largely political task, i.e., fight for and win a larger role in financial regulation under the currently-proposed so-called 'reform' bill. Others allege that the SEC is attempting to fill the media with stories about the SEC that don't focus on its decision to leave Allen Stanford alone years ago. In short, the high profile Goldman case is meant to focus public attention on the agency and a major financial sector vendor. Perhaps even curry favor with Congressional Democrats for delivering a convenient victim in time to drive passage of the legislation. Jenkins wrote,
"The need for villains frequently (not always) conflicts with the need for understanding. The SEC certainly understands the need for a rapid route to rehabilitation for itself if it hopes for a share of the power and budget up for grabs in the Senate debate over financial reform. If you don't think this played a role in the suit it sprang on Goldman last week, we have a CDO to sell you."
Jenkins also argued persuasively that much about the Abacus case involves a latent public and regulatory distaste for those who profit on the short side of transactions. Though necessary and helpful to real, free markets, short-side activity carries a stigma, since the profit comes from the destruction of someone else's financial value. He also contended in his column,
"Goldman will have to decide for itself if its business model can be defended in the court of public opinion. But let's admit there's an implicit long bias to the SEC's case. Nobody would give a hoot if Mr. Paulson were the party who lost money. The SEC would never have gone on its hunt for something, anything, to hang a fraud case on."
I think it's fair to say that dealings between a complicated, multi-business financial giant like Goldman and institutional counterparties is very different than from, say, GE's jet engine business and an airline.
There are lots of rules governing how the execution of trades in financial markets are to be performed which, generally, lend a bias against the legality of too much coziness between parties in the business. For example, a firm having securities underwritten by a firm like Goldman must understand that Goldman couldn't hide material information about the firm when selling the securities to its customers.
Years ago, Frank Quattrone, then of CSFB, was accused of illegal behavior resulting from alleged ties between IPO allocations and other business activities.
My point is that employees at institutions dealing with major market-making, trading firms, including the now-commercial banks such as Goldman Sachs and Morgan Stanley, are wise to view any solicitations to buy securities cautiously.
One natural reaction of a potential buyer could, and should be,
"If it's such a great deal, why are letting me in, and not keeping it all for yourself?"
There are some valid answers, such as selling a sufficient amount of a security to ensure a liquid market for future trading and valuation. But the core of the question is germane, especially to a firm like Goldman, which has so many different businesses in the financial sector. Its GSAM asset management group could well provide a sufficient appetite for many choice Goldman underwriting products.
From this perspective, it's simply ludicrous that the SEC would claim that Goldman failed to tell potential buyers of the CDOs who had been involved in their creation. All of the sophisticated investors with whom they dealt, former SEC legal personnel's opinions notwithstanding, had both the savvy and opportunity, as Holman Jenkins noted in his column, to ask for sufficient information prior to their purchase of the CDOs from Goldman.
If it were truly important to an institutional investor to know the provenance of the entire Abacus deal, and Goldman refused to disclose it, well, I would expect such an investor to refrain from buying the CDOs.
At no time does it appear that any Goldman employee put a gun to any institutional investor's head to force her/him to buy any of the Abacus deal.
At this point, I'm guessing that Goldman is eager to get to trial, in order to publicly dimantle the SEC's case. Short of that, a withdrawal of the suit by the agency would be the next best remedy.
Failing the disclosure of some truly illegal, explicit misrepresentation of the Abacus deal by Goldman personnel, though, it's looking less likely that the SEC complaint has merit in the context the world of sophisticated institutional investors.
Wednesday, April 21, 2010
Ed Whitacre's Disingenuous Photo-Op
Unelected, government-appointed GM CEO and Chairman Ed Whitacre wrote an editorial timed to appear in this morning's Wall Street Journal in conjunction with his CNBC photo-op showing him repaying $5.8B of government loans to the US and Canada.
It was amusing to watch CNBC anchors congratulating themselves and reporter Phil LeBeau for an interview with Whitacre that, honestly, would have been best if it had never occurred. Talk about free advertising while misleading the public! Just another benefit of crony capitalism- more on that a little later on in this post.
It's a truly disingenuous staging of something Whitacre wants us all to cheer, but, in reality, should remind us to be disappointed and angry.
Elements of Whitacre's Journal piece appear below in italcs, with my comments following.
Today, General Motors is announcing that it has made a payment of $5.8 billion to the U.S. Treasury and Export Development Canada. We're paying back—in full, with interest, years ahead of schedule—loans made to help fund the new GM.
Our ability to pay back these loans less than a year after emerging from bankruptcy is a sign that our plan for building a new GM is working. It is also an important step toward eventually reducing the amount of equity the governments of the U.S., Canada and Ontario hold in our company. Combined, these governments hold a majority of GM's equity, and we want citizens to know how their governments' money is being put to work.
Too bad, Ed, as Gerald O'Driscoll recently wrote in the Journal, that citizens of the countries didn't get to allocate that capital via free markets but, instead, were forced to watch their governments engage in crony capitalism. Why bother with the photo-op Ed, when all you have to do is convince Congress and the administration to continue supporting you?
Oh, and that union which was basically paid off, while shareholders and creditors got stuffed. Did you agree with all those actions, Ed?
Wait, you spent your entire career in one of the most heavily-regulated industries in history, telecom. You're used to fawning on your knees to government officials.
Following the initial crisis and the bankruptcy of the old GM last year, a new GM has emerged as a leaner, stronger company. We have eight new members on our 13-member board of directors. Twelve of the top 13 senior leaders are new to GM (from places outside the industry such as Microsoft and AT&T) or in new jobs at the company. You can feel a renewed energy and commitment at GM. Our new vehicles are generating sales, and these sales are allowing us to make investments and create jobs.
To support our steady sales growth at Chevrolet, Buick, GMC and Cadillac, in the past nine months we have made investments totaling more than $1.5 billion at 20 facilities in the U.S. and Canada, restoring or creating more than 7,500 jobs. Just this morning we announced that we will make a $257 million investment in existing plants in Detroit and Kansas City, Kan., to build the next generation of our award-winning Chevy Malibu.
Gee, Ed, aren't you forgetting a little thing in economics called "opportunity costs?"
Who are you, or any government official, to say that the alleged new 7,500 jobs at GM are better than letting capital markets create jobs?
Maybe if GM were allowed to go through a normal bankruptcy, and another firm had bought and reorganized various divisions of the old GM, all that borrowed Canadian and US money may have stayed in the private sector and funded other, better jobs with new firms.
My brilliant boss at Chase, SVP Gerry Weiss, used to remind us that the real value of informed resource allocation across the bank's many businesses was realized by transferring money and employee counts from the least-efficient, money-losing units, to more efficient, more profitable and, typically, much faster-growing units. The major delta in the bank's performance would result from this move of resources from extremes. From extremely bad uses to extremely good uses.
It is just this process that is frustrated by crony capitalism such as we've witnessed in the GM bailout. Instead of the resources wasted at GM being freed up to be used elsewhere in the economy, they were allowed to remain in place, then more capital added, from taxpayers, as a free equity injection. Free to GM, but very costly to taxpayers and the economy in general.
Did you ever consider that, Ed? Isn't that an unseen, hidden, but very real cost to our economy?
What about the lasting damage to the US economy by having global investors watch us bail out a failed company in an old industry with borrowed and printed money? You don't think that will have lasting negative consequences for the US economy in terms of government borrowing costs, or the ability to continue borrowing in global markets? Will investors really want to invest in a country, knowing their funds go to overpaid union workers at a has-been, failed auto company?
Aren't these also hidden costs of the GM bailout?
Of course they are. This is what O'Driscoll highlighted as the downside of crony capitalism. Economics is about efficient allocation of resources in a free market of true prices, not politically-motivated bailouts of old, commoditized industries supporting bloated payrolls of highly-paid, over-paid union workers churning out largely unwanted vehicles. That's how GM managed to go bankrupt, Ed.
If you can't understand the notion of opportunity costs and efficient resource allocation, Ed, maybe you're not the right guy to chair a major US corporation. Then, again, since GM is, in essence, now just another government agency, I guess you probably qualify as a government bureaucrat, after all those years being just like one while running a Bell System operating company.
As a global car maker, GM is investing in energy solutions that will increase efficiency across our vehicle lineup in the United States. For example, we are adding a third shift and 1,050 jobs at our plant in Lordstown, Ohio, to build the fuel-efficient Chevy Cruze, which has been a hit in every region where it has been introduced. An Eco version of the Cruze, with a 40 miles-per-gallon highway rating, will give customers the fuel economy of a hybrid without the high price tag.
This year, we will introduce the Chevrolet Volt, which can provide up to 40 miles of electric-only, emissions-free driving, backed up with a range extender (a small engine) that can keep you going should the battery run low. Developing the Volt has led to new investments in battery labs and battery manufacturing and it has put GM, and by extension the North American car industry, in the front row of the global electric vehicle race.
Ed, I can't help but think that dozens of smaller, truly electric power-oriented startups would have done much better on this sort of product and component development than you will at GM.
After all, as a conventional car maker, GM failed. You guys couldn't even make money on gasoline-powered vehicles.
Now, with absolutely NO risk premium, but, instead, sweetheart loans and equity injections from Washington, you expect all of us to believe your crew can profitably do in alternative fuel vehicles that at which you failed in a technology in which you had nearly a hundred years of experience?
C'mon, we're not that naive. Capital markets never would have funded GM doing this. That's why you went broke. Instead, many smaller, more innovative, hungrier firms convinced the private sector to invest in their ideas.
You and your company simply mozied up to the public trough and began chowing down on low-cost taxpayer funding.
We still have a lot of hard work ahead of us, but we are making real progress toward our vision of designing, building and selling the world's best vehicles.
Nobody was happy that GM needed government loans—not the governments, not the taxpayers and, quite frankly, not the company. We believe we can best thank the citizens of the U.S. and Canada by making sure that their investments are hard at work every day, building high quality, fuel-efficient vehicles our customers can count on.
Ed, I believe you can best reward citizens by immediately selling the company into whatever pieces private sector buyers might want. And simply close the rest. True, the government-run faux-bankruptcy of GM, to the benefit of unions, and detriment of legitimate creditors, was a mistake.
And we can't really undo it entirely. But we can still terminate it earlier, at less opportunity cost to our economy, by doing now what should have been done over a year ago. Force GM off government life support, force it out into the private sector whole or in pieces, forcing taxpayers, the federal government and, most of all, you, Ed, to see what a discount to the government's bailout price is taken on the IPO.
Now, wouldn't that be eye-opening? Somehow, Ed, I doubt you'd be toasting that event.
It was amusing to watch CNBC anchors congratulating themselves and reporter Phil LeBeau for an interview with Whitacre that, honestly, would have been best if it had never occurred. Talk about free advertising while misleading the public! Just another benefit of crony capitalism- more on that a little later on in this post.
It's a truly disingenuous staging of something Whitacre wants us all to cheer, but, in reality, should remind us to be disappointed and angry.
Elements of Whitacre's Journal piece appear below in italcs, with my comments following.
Today, General Motors is announcing that it has made a payment of $5.8 billion to the U.S. Treasury and Export Development Canada. We're paying back—in full, with interest, years ahead of schedule—loans made to help fund the new GM.
Our ability to pay back these loans less than a year after emerging from bankruptcy is a sign that our plan for building a new GM is working. It is also an important step toward eventually reducing the amount of equity the governments of the U.S., Canada and Ontario hold in our company. Combined, these governments hold a majority of GM's equity, and we want citizens to know how their governments' money is being put to work.
Too bad, Ed, as Gerald O'Driscoll recently wrote in the Journal, that citizens of the countries didn't get to allocate that capital via free markets but, instead, were forced to watch their governments engage in crony capitalism. Why bother with the photo-op Ed, when all you have to do is convince Congress and the administration to continue supporting you?
Oh, and that union which was basically paid off, while shareholders and creditors got stuffed. Did you agree with all those actions, Ed?
Wait, you spent your entire career in one of the most heavily-regulated industries in history, telecom. You're used to fawning on your knees to government officials.
Following the initial crisis and the bankruptcy of the old GM last year, a new GM has emerged as a leaner, stronger company. We have eight new members on our 13-member board of directors. Twelve of the top 13 senior leaders are new to GM (from places outside the industry such as Microsoft and AT&T) or in new jobs at the company. You can feel a renewed energy and commitment at GM. Our new vehicles are generating sales, and these sales are allowing us to make investments and create jobs.
To support our steady sales growth at Chevrolet, Buick, GMC and Cadillac, in the past nine months we have made investments totaling more than $1.5 billion at 20 facilities in the U.S. and Canada, restoring or creating more than 7,500 jobs. Just this morning we announced that we will make a $257 million investment in existing plants in Detroit and Kansas City, Kan., to build the next generation of our award-winning Chevy Malibu.
Gee, Ed, aren't you forgetting a little thing in economics called "opportunity costs?"
Who are you, or any government official, to say that the alleged new 7,500 jobs at GM are better than letting capital markets create jobs?
Maybe if GM were allowed to go through a normal bankruptcy, and another firm had bought and reorganized various divisions of the old GM, all that borrowed Canadian and US money may have stayed in the private sector and funded other, better jobs with new firms.
My brilliant boss at Chase, SVP Gerry Weiss, used to remind us that the real value of informed resource allocation across the bank's many businesses was realized by transferring money and employee counts from the least-efficient, money-losing units, to more efficient, more profitable and, typically, much faster-growing units. The major delta in the bank's performance would result from this move of resources from extremes. From extremely bad uses to extremely good uses.
It is just this process that is frustrated by crony capitalism such as we've witnessed in the GM bailout. Instead of the resources wasted at GM being freed up to be used elsewhere in the economy, they were allowed to remain in place, then more capital added, from taxpayers, as a free equity injection. Free to GM, but very costly to taxpayers and the economy in general.
Did you ever consider that, Ed? Isn't that an unseen, hidden, but very real cost to our economy?
What about the lasting damage to the US economy by having global investors watch us bail out a failed company in an old industry with borrowed and printed money? You don't think that will have lasting negative consequences for the US economy in terms of government borrowing costs, or the ability to continue borrowing in global markets? Will investors really want to invest in a country, knowing their funds go to overpaid union workers at a has-been, failed auto company?
Aren't these also hidden costs of the GM bailout?
Of course they are. This is what O'Driscoll highlighted as the downside of crony capitalism. Economics is about efficient allocation of resources in a free market of true prices, not politically-motivated bailouts of old, commoditized industries supporting bloated payrolls of highly-paid, over-paid union workers churning out largely unwanted vehicles. That's how GM managed to go bankrupt, Ed.
If you can't understand the notion of opportunity costs and efficient resource allocation, Ed, maybe you're not the right guy to chair a major US corporation. Then, again, since GM is, in essence, now just another government agency, I guess you probably qualify as a government bureaucrat, after all those years being just like one while running a Bell System operating company.
As a global car maker, GM is investing in energy solutions that will increase efficiency across our vehicle lineup in the United States. For example, we are adding a third shift and 1,050 jobs at our plant in Lordstown, Ohio, to build the fuel-efficient Chevy Cruze, which has been a hit in every region where it has been introduced. An Eco version of the Cruze, with a 40 miles-per-gallon highway rating, will give customers the fuel economy of a hybrid without the high price tag.
This year, we will introduce the Chevrolet Volt, which can provide up to 40 miles of electric-only, emissions-free driving, backed up with a range extender (a small engine) that can keep you going should the battery run low. Developing the Volt has led to new investments in battery labs and battery manufacturing and it has put GM, and by extension the North American car industry, in the front row of the global electric vehicle race.
Ed, I can't help but think that dozens of smaller, truly electric power-oriented startups would have done much better on this sort of product and component development than you will at GM.
After all, as a conventional car maker, GM failed. You guys couldn't even make money on gasoline-powered vehicles.
Now, with absolutely NO risk premium, but, instead, sweetheart loans and equity injections from Washington, you expect all of us to believe your crew can profitably do in alternative fuel vehicles that at which you failed in a technology in which you had nearly a hundred years of experience?
C'mon, we're not that naive. Capital markets never would have funded GM doing this. That's why you went broke. Instead, many smaller, more innovative, hungrier firms convinced the private sector to invest in their ideas.
You and your company simply mozied up to the public trough and began chowing down on low-cost taxpayer funding.
We still have a lot of hard work ahead of us, but we are making real progress toward our vision of designing, building and selling the world's best vehicles.
Nobody was happy that GM needed government loans—not the governments, not the taxpayers and, quite frankly, not the company. We believe we can best thank the citizens of the U.S. and Canada by making sure that their investments are hard at work every day, building high quality, fuel-efficient vehicles our customers can count on.
Ed, I believe you can best reward citizens by immediately selling the company into whatever pieces private sector buyers might want. And simply close the rest. True, the government-run faux-bankruptcy of GM, to the benefit of unions, and detriment of legitimate creditors, was a mistake.
And we can't really undo it entirely. But we can still terminate it earlier, at less opportunity cost to our economy, by doing now what should have been done over a year ago. Force GM off government life support, force it out into the private sector whole or in pieces, forcing taxpayers, the federal government and, most of all, you, Ed, to see what a discount to the government's bailout price is taken on the IPO.
Now, wouldn't that be eye-opening? Somehow, Ed, I doubt you'd be toasting that event.
Gerald O'Driscoll, Jr. On Inept Regulation vs. Free Markets
Gerald O'Driscoll, Jr., currently with the Cato Institute, wrote a masterful exposition of various aspects of the current US financial markets and economy in an editorial in yesterday's Wall Street Journal entitled "An Economy of Liars." It is an excellent example of why the field was originally known as political economy.
Among the more notable passages in Mr. O'Driscoll's editorial were these,
"Free markets depend on truth telling. Prices must reflect the valuations of consumers; interest rates must be reliable guides to entrepreneurs allocating capital across time; and a firm's accounts must reflect the true value of the business. Rather than truth telling, we are becoming an economy of liars. The cause is straightforward: crony capitalism.
We have now learned of the creative way Lehman Brothers hid its leverage (how much money it was borrowing) by the use of a Repo 105. The Repo 105 meant Lehman temporarily swapped assets (such as bonds) for cash. A Repo, or repurchasing agreement, is a way to borrow money. But an accounting rule allowed Lehman to book the transaction as a sale and reduce its reported borrowings, according to a report by the court-appointed Lehman bankruptcy examiner, a former federal prosecutor, last month.
Are we to believe that regulators were unaware? Last week Goldman Sachs was accused in a civil fraud suit of deceiving many clients for the benefit of another, hedge-fund operator John Paulson.
The idea that multiplying rules and statutes can protect consumers and investors is surely one of the great intellectual failures of the 20th century. Any static rule will be circumvented or manipulated to evade its application. Better than multiplying rules, financial accounting should be governed by the traditional principle that one has an affirmative duty to present the true condition fairly and accurately—not withstanding what any rule might otherwise allow. And financial institutions should have a duty of care to their customers. Lawyers tell me that would get us closer to the common law approach to fraud and bad dealing.
Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.
We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith.
Distorted prices and interest rates no longer serve as accurate indicators of the relative importance of goods. Crony capitalism ensures the special access of protected firms and industries to capital. Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery.
If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets. That means the end to price-distorting subsidies, which include artificially low interest rates. No one admits to preferring crony capitalism, but an expansive regulatory state undergirds it in practice.
Piling on more rules and statutes will not produce something different than it has in the past. Reliance on affirmative principles of truth-telling in accounting statements and a duty of care would be preferable. Deregulation is not some kind of libertarian mantra but an absolute necessity if we are to exit crony capitalism. "
Mr. O'Driscoll reinforces several points that I've made in prior posts, i.e., fallible regulators and easily-influenced legislators are the reality in our system. It does no good to demand ever more complicated, restrictive laws, when those charged to implement them are less capable than those they are tasked to monitor. Or the laws themselves are written to benefit the currently-powerful.
There's quite a bit of Br'er Rabbit in the current Dodd financial regulatory "reform" bill. Firms such as Goldman Sachs, Chase, Citigroup and Morgan Stanley are quite aware that their special status as bailout candidates will confer upon them lower funding costs from counterparties than their competitors will pay.
Crony capitalism, indeed. Bi-partisan, to be sure, as well.
Those of us who advocate less regulation are often painted as greedy, anti-consumerist, anti-poor, pro-wealthy, and/or desiring a return to some mythical bad old era in the historical vicinity of the years prior to and including the Gilded Age and its so-called Robber Barons.
Being anti-regulation isn't about desiring to give the wealthy or powerful added advantages. Rather, it's fundamentally about acknowledging the inability of so much regulatory activity to deliver on its promise.
For example, SEC regulations mandate that annual reports of publicly-held companies be audited. Have you ever read the disclaimers on standard auditor statements in those reports? They make the concept a mockery.
For many years, I have believed that a much better solution would be for the SEC to drop the requirement. It's my belief that the major accounting firms would quickly offer their corporate clients much tougher, non-disclaimer audits, for a higher price, that would provide a much more credible seal of approval. Not every company could qualify for a clean bill of health under such scrutiny.
Instead, we have SEC-compliant disasters like WorldCom and Enron.
Regulators and regulatory processes are extremely fallible in the best of situations.
O'Driscoll is, I believe, correct to advise that it's better for parties to economic transactions to perform their own due diligence, take precautions as they see fit, and live with the consequences.
If regulators couldn't stop Madoff before his scheme grew to epic proportions, nor discover the Lehman Repo 105 tactic, why should we believe they will ever, under any existing or new regulatory framework, do a better job in the future?
Rather than trust in empty promises and imperfect regulatory schemes, let's stop trying to protect market participants from themselves, and let each be responsible for their own actions.
Free markets reward competence, innovation and appropriate risk management. Those who fail at these ought to lose their capital and be rinsed from the system, lest they become too large a drag on the productivity and growth in wealth, system-wide, that naturally arise from the efficient allocation of resources in a free market economy.
Among the more notable passages in Mr. O'Driscoll's editorial were these,
"Free markets depend on truth telling. Prices must reflect the valuations of consumers; interest rates must be reliable guides to entrepreneurs allocating capital across time; and a firm's accounts must reflect the true value of the business. Rather than truth telling, we are becoming an economy of liars. The cause is straightforward: crony capitalism.
We have now learned of the creative way Lehman Brothers hid its leverage (how much money it was borrowing) by the use of a Repo 105. The Repo 105 meant Lehman temporarily swapped assets (such as bonds) for cash. A Repo, or repurchasing agreement, is a way to borrow money. But an accounting rule allowed Lehman to book the transaction as a sale and reduce its reported borrowings, according to a report by the court-appointed Lehman bankruptcy examiner, a former federal prosecutor, last month.
Are we to believe that regulators were unaware? Last week Goldman Sachs was accused in a civil fraud suit of deceiving many clients for the benefit of another, hedge-fund operator John Paulson.
The idea that multiplying rules and statutes can protect consumers and investors is surely one of the great intellectual failures of the 20th century. Any static rule will be circumvented or manipulated to evade its application. Better than multiplying rules, financial accounting should be governed by the traditional principle that one has an affirmative duty to present the true condition fairly and accurately—not withstanding what any rule might otherwise allow. And financial institutions should have a duty of care to their customers. Lawyers tell me that would get us closer to the common law approach to fraud and bad dealing.
Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.
We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith.
Distorted prices and interest rates no longer serve as accurate indicators of the relative importance of goods. Crony capitalism ensures the special access of protected firms and industries to capital. Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery.
If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets. That means the end to price-distorting subsidies, which include artificially low interest rates. No one admits to preferring crony capitalism, but an expansive regulatory state undergirds it in practice.
Piling on more rules and statutes will not produce something different than it has in the past. Reliance on affirmative principles of truth-telling in accounting statements and a duty of care would be preferable. Deregulation is not some kind of libertarian mantra but an absolute necessity if we are to exit crony capitalism. "
Mr. O'Driscoll reinforces several points that I've made in prior posts, i.e., fallible regulators and easily-influenced legislators are the reality in our system. It does no good to demand ever more complicated, restrictive laws, when those charged to implement them are less capable than those they are tasked to monitor. Or the laws themselves are written to benefit the currently-powerful.
There's quite a bit of Br'er Rabbit in the current Dodd financial regulatory "reform" bill. Firms such as Goldman Sachs, Chase, Citigroup and Morgan Stanley are quite aware that their special status as bailout candidates will confer upon them lower funding costs from counterparties than their competitors will pay.
Crony capitalism, indeed. Bi-partisan, to be sure, as well.
Those of us who advocate less regulation are often painted as greedy, anti-consumerist, anti-poor, pro-wealthy, and/or desiring a return to some mythical bad old era in the historical vicinity of the years prior to and including the Gilded Age and its so-called Robber Barons.
Being anti-regulation isn't about desiring to give the wealthy or powerful added advantages. Rather, it's fundamentally about acknowledging the inability of so much regulatory activity to deliver on its promise.
For example, SEC regulations mandate that annual reports of publicly-held companies be audited. Have you ever read the disclaimers on standard auditor statements in those reports? They make the concept a mockery.
For many years, I have believed that a much better solution would be for the SEC to drop the requirement. It's my belief that the major accounting firms would quickly offer their corporate clients much tougher, non-disclaimer audits, for a higher price, that would provide a much more credible seal of approval. Not every company could qualify for a clean bill of health under such scrutiny.
Instead, we have SEC-compliant disasters like WorldCom and Enron.
Regulators and regulatory processes are extremely fallible in the best of situations.
O'Driscoll is, I believe, correct to advise that it's better for parties to economic transactions to perform their own due diligence, take precautions as they see fit, and live with the consequences.
If regulators couldn't stop Madoff before his scheme grew to epic proportions, nor discover the Lehman Repo 105 tactic, why should we believe they will ever, under any existing or new regulatory framework, do a better job in the future?
Rather than trust in empty promises and imperfect regulatory schemes, let's stop trying to protect market participants from themselves, and let each be responsible for their own actions.
Free markets reward competence, innovation and appropriate risk management. Those who fail at these ought to lose their capital and be rinsed from the system, lest they become too large a drag on the productivity and growth in wealth, system-wide, that naturally arise from the efficient allocation of resources in a free market economy.
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