shaping the new financial architecture…

Eleven principles of financial reform

Posted in progress, TBTF by Kitty on February 17, 2010

Repost from Jesse’s Cafe

~~~ “Personally I doubt that the US is capable of self-reform at this time.

The corruption of the socio-political system runs deep, and is embedded in the national consciousness as a reflexive set of slogans (the big lies) that substitute for practical thought and effective policy formation.

The examples of thinkspeak are numerous. People become parrots for their favorite corporate news/opinion channel, to which they become emotionally addicted, because otherwise, reality is too painful and complex to face. And so they are blinded and cut off from productive and even civil discourse, trapped within deep wells of subjectivity.

The major media in the States are owned by a few corporations. The Congress listens to its large contributors and ignores the public except at election time, when it inundates them with expensive media campaigns, political spin, false promises, and propaganda. And then it is back to business as usual.

“When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.” Frederic Bastiat

What will it take? It took the Japanese about twenty years of economic privation to finally get rid of the LDP political party that had ruled the country since the Second World War. It may take ten years of stagflation and economic hardship for the American people to wake up and put an end to the crony capitalism that has captured its two party political system. A good start would be to continue to defeat incumbents from both parties, and to start electing viable third party candidates.

But that demands a more thoughtful venue than is currently the norm. It really does seem that bad to a relatively objective observer.

Vox
Eleven Lessons From Iceland
Thorvaldur Gylfason
13 February 2010

…What can be done to reduce the likelihood of a repeat performance – in Iceland and elsewhere? Here are eleven main lessons from the Iceland story, lessons that are likely to be relevant in other, less extreme cases as well.

Lesson 1. We need effective legal protection against predatory lending just as we have long had laws against quack doctors. The problem is asymmetric information. Doctors and bankers typically know more about complicated medical procedures and complex financial instruments than their patients and clients. The asymmetry creates a need for legal protection through judicious licensing and other means against financial (as well as medical) malpractice to protect the weak against the strong.

Lesson 2. We should not allow rating agencies to be paid by the banks they have been set up to assess. The present arrangement creates an obvious and fundamental conflict of interest and needs to be revised. Likewise, banks should not be allowed to hire employees of regulatory agencies, thereby signalling that by looking the other way, remaining regulators may also expect to receive lucrative job offers from banks. (I would add a prohibition of movement between regulators and the banks without a significant hiatus of at least four years. – Jesse)

Lesson 3. We need more effective regulation of banks and other financial institutions; presently, this is work in progress in Europe and the US (Volcker 2010). (Too slow, too driven by the banks themselves in the US – Jesse)

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Teapot Dome 2.0?

Posted in Federal Reserve, Senate Banking Committee by Kitty on January 31, 2010

April 15, 1922 Senate Investigates the "Teapot Dome" Scandal

Repost from Jesse’s Cafe

“I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals — too many counterparties, too many lawyers and advisors, too many people from AIG — to keep a determined Congress from the information.” James P. Bergin, NY Fed, in an email to his Fed colleagues.

‘Though it is hard to divine much understanding from the unredacted filing, it has become clear that Goldman had more involvement than previously believed: In addition to the credit default swaps it bought from AIG, the filing shows that Goldman Sachs also originated many of the underlying assets that AIG and the New York Fed bought back from Société Générale.

The American people have the right to know how their tax dollars were spent and who benefited most from this back-door bailout,” said Kurt Bardella, spokesman for Issa. “Now that it’s public, let’s see if the sky really does fall as the New York Fed said it would to justify its coverup.”

Other lawmakers believed that the New York Fed was trying to hide its ties to Goldman Sachs.’ AIG Reveals the Story – CNN

“Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.

We’re talking about the Federal Reserve Bank of New York, whose role as the most influential part of the federal-reserve system — apart from the matter of AIG’s bailout — deserves further congressional scrutiny…

By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve

This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed’s bailout programs. It’s as though the New York Fed was a black-ops outfit for the nation’s central bank

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Why do we trust the financial priests?

Posted in TBTF by Kitty on January 10, 2010

*Source:   Why do we trust the financial priests? BBC, Robert Peston, Saturday, 9 January 2010

“The Icelanders have risen up and humiliated their political class over its handling of the financial crisis, as I mentioned on Thursday.

But there’s nothing terribly unusual about their sense of powerlessness and alienation from the writing of the rules of the banking and finance game.

When it comes to how banks are allowed to behave, sovereignty over decision-making rarely rests with citizens.

Did anyone actually ask us whether we wanted our banks rescued to the tune of £1.2 trillion during and after the crisis of 2008?

If they had, we might have said no.

So perhaps it’s a good thing that politicians and central bankers simply did what they thought was best for us, without consulting – because if the banks had gone down, the contraction in our economy would have been far far worse than it turned out to be. Better to leave it to the experts, eh?

But hang on a tick: who actually got us into this mess in the first place?

It wasn’t the fault of ordinary citizens like you and me.

It was those self-proclaimed experts who allowed our banks to become too huge, too complicated, too addicted to taking crazy risks, and too poorly endowed with life-preserving capital.

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Down in the weeds…

Posted in TBTF by Kitty on December 10, 2009

The House of Representatives has begun the debate on the Wall Street Reform and Consumer Protection Act… (HR 4173)

The real devil lurking in the details is the regulation of derivatives

The weeds of the competing legislative proposals are a little thick but the high level concept relates to where the derivatives trade gets done…

Will the trade get done in the light or in the dark?

Will the trade get done on a public exchange or alternative swap facility?

Or will it be done during a phone call between two big banks and then buried deep in an opaque trading book? Where it will lurk as a weapon of mass destruction as Warren Buffett would say

Derivatives trading must happen in the light…

These trades must be done publicly to provide stability in our financial system…

Remember the AIG darkness? Which almost melted down the global economy… it was really dark around all those AIG trades… dark as a graveyard.

* * *

Here are the particular details where the devil is lurking… from Baseline Scenario:

Colin Peterson (D-MN), Chairman of the House Committee on Agriculture, along with Barney Frank, has added an amendment to the OTC Bill (opens large pdf). There are two relevant sentences for reformers from the long document. The first is on page 32:

(49) SWAP EXECUTION FACILITY.–The term ‘swap execution facility’ means a person or entity that facilitates the execution or trading of swaps between two persons through any means of interstate commerce, but which is not a designated contract market, including any electronic trade execution or voice brokerage facility.

This replaces other language in the original bill (opens even larger pdf), on page 546:

SEC. 5h. SWAP EXECUTION FACILITIES.
(a) REGISTRATION.–
(1) INGENERAL.–
(A) No person may operate a swap execution facility unless the facility is registered under this section.

(B) The term ‘swap execution facility’ means an entity that facilitates the execution of swaps between two persons through any means of interstate commerce but which is not a designated contract market.

So notice any differences? First the definition of a swap execution facility has been expanded to include “a person” (different from the “or entity”). It’s also expanded to an “or trading” definition, and includes voice brokerage firms. So now we are moving from the definition of something that is a platform for swaps to be traded on to instead something that simply helps swaps get traded. This could, quite simply, be a telephone over which two people trade a derivative (with one person declaring himself to be the exchange?). Instead of changing the way business is done for reform it looks like it redefines reform as the way things are currently done, and just calls it a victory.

Now on page 89 of the amendment:

2) RULES FOR TRADING THROUGH THE FACILITY.–Not later than 1 year after the date of the enactment of the Derivative Markets transparency and Accountability Act of 2009, the Commission shall adopt rules to allow a swap to be traded through the facilities of a designated contract market or a swap execution facility. Such rules shall permit an intermediary, acting as principal or agent, to enter into or execute a swap, notwithstanding section 2(k), if the swap is executed, reported, recorded, or confirmed in accordance with the rules of the designated contract market or swap execution facility.

* * *

To see the legislation and amendments here

Here are all the amendments that are being debated on the floor:

The ‘manager’s amendment‘ is a kitchen-sink amendment that pulls in all the last minute deals (so you can actually see handwriting on the PDF). It is 242 pages long and that is where you are going to find a lot of important policy changes.